Corporate & Securities Law

Keeping a Seed Financing Round Open

By Ryan Roberts

Startups don’t want to wait until every investor is ready before closing on a seed financing round. First, the roster of investors will not be identified and/or cutting checks on the same day. Second, what startup wants to wait on cash?

Therefore, most seed financings allow for an initial close (i.e., that first investor check) with an extension period for future investors. But in order to properly accomplish this, your startup will have to keep the round “open” via the deal documents.

Here’s what an open round mechanism might look like in a convertible note financing document:

The initial closing of the sale and purchase of the Notes (the ?Initial Closing?) shall occur on [DATE], or such other date as is agreed upon by the Company and the Purchasers (the ?Closing Date?). The Company may sell all or part of the remaining Notes in one or more subsequent Closings to be held on or before [X] days after the Initial Closing (each a ?Subsequent Closing Date?). Each Purchaser at such Subsequent Closing Date shall become a party to this Agreement and shall have the rights of, and be subject to limitations applicable to ?Purchasers? hereunder.

From the investor’s perspective, they don’t want the round to extend forever and let subsequent investors get in on the same terms several years from now. Thus, 60-90 days is a fairly common “final close date” and anything beyond that you probably need strong justification. But remember that while a lot of these deal structures are standard — each individual deal is unique. Additionally, there is a push to keep seed financing rounds open for longer than the “normal” open period.

Full post as published by The Startup Lawyer on August 23, 2010 (boomark / email).