It’s the 9th inning. The bases are loaded. You have the game-winning run on third. As an angel investor who is leading a deal, this is how it feels when you’ve done everything needed to close the round. The investors are on board. The terms are negotiated. So what could go wrong? What gets a player thrown out at home plate?
Christopher Mirabile says, “This is time for angels and entrepreneurs alike to mind the basics, including the smallest details of deal documents—some of which can spiral a deal out of control.” Christopher is an experienced angel investor who has led many angel deals. Among other things, he is Co-Managing Director of LaunchPad Venture Group, Founder of Seraf, an angel portfolio management company, and Chairman of Angel Capital Association. He has the experience and expertise to prepare for curveballs, ensuring the game-winning run gets to home plate (AKA the deal closes).
So what is one of the biggest “unforced errors” in early stage investing? According to Christopher, “It’s the 11th-hour deal document dump-- a giant mess of unorganized, inscrutably named PDF, Excel and MS Word files that arrives via email late on a Friday night from a person you never heard of.” Worse, the email demands immediate attention and response.
In the rush to move a deal to close, this dump-and-ditch scenario is all too common, and one that nearly every investor has faced.
The predictable result of this mess? Investors are confused, frustrated and annoyed. It isn’t clear what documents need to be signed and which are for information only. Important details such as where to sign in multiple places or which documents should be signed by existing investors or by everyone are missing. Necessary signatures are not returned in time for the closing. This causes closing delays and wastes extra time and money chasing down missing paperwork. The good news is it’s a common mistake that is easy to avoid.
According to Christopher, if you are a deal lead (or even if you’re just one of many angels in the deal), it’s critical to make absolutely sure the lawyers in charge of the closing send each investor an email that is organized with these four essential elements:
1. Single Signature Page Document
It is best to have a single omnibus signature page and it should be a separate document that includes all the required signatures from every document, and nothing else. To ensure absolute clarity, the signature page document should feature a very simple, obvious, and suggestive file name like "Required Signatures Document” or “Sign Here.”
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2. One-Page Instruction Sheet
Make sure the attorneys also send a clearly named, one-page instruction sheet is the detail checklist to ensure that investors do what is needed and on deadline. It contains:
- instructions for returning documents
- deadlines by when signed documents must be returned
- physical mailing address for those sending checks and/or wire transfer instructions for those sending wires
- telephone and email address of someone investors can contact with questions
3. Complete Set of Deal Documents
This electronic file contains everything investors need for their records. The ideal approach is to assemble the documents into one PDF “binder”. Make sure to create a table of contents (most PDF editors make this assembly fairly easy). Alternatively, an email with a bundle of individual documents is an acceptable second choice if short, descriptive file names are used for easy reference.
If for some unpredictable reason the documents must be sent by physical mail, use an inexpensive memory stick. Mailing hard copies is also inconsiderate– crazy as that sounds, it is just more work for everyone since most investors will have to scan and upload document to their computer.
4. Next Steps Summary
The final essential item is a short, clear memo outlining the next steps to expect. Whether this summary is in the body of the email or is a separate instruction sheet, it should explicitly state what will happen next:
- expected close date
- how the closing will be announced to investors
- when the counter-signed deal will be received
- when stock certificates are expected
- any other pertinent, near-term details
Although these four organizing principals are all common sense advice, when they aren’t used, oftentimes details are omitted or forgotten with remarkable frequency. Whether it is attributable to inexperience and/or the rush to get over the already-delayed finish line, the result is the same: confusion and aggravation for investors, followed by totally avoidable closing delays.
As angel investors we quickly learn that there are many sound reasons that a deal might not close, and an 11th-hour dump of closing deal documents doesn’t have to be one of them. Here’s hoping that more attorneys in the early-stage space recognize this and provide deal documents in the formats that close deals quickly. Everyone wins this way.
