Term Sheets: What are closing conditions?
This is Part 31 of Founder FOMO. A weekly briefing answering common questions we get from our founder friends, colleagues, and clients.
This week we continue our series on key VC financing deal terms.
This week’s question: What do I need to know about closing conditions in a VC financing?
Our answer: Closing conditions are the specific requirements that must be met before a VC financing deal closes; think of them as a final checklist for both sides to confirm that things are in order before the money and preferred stock change hands. While many conditions are standard across deals, others will depend on the stage and company-specific risks. For startups, common closing conditions include confirming representations and warranties at closing, approving the final forms of deal documents, obtaining board and stockholder consents (often with officer certificates verifying them), and delivering key documents such as the restated certificate of incorporation. Late stage startup may have unique or more burdensome conditions such as regulatory approvals, revenue milestones, and leadership changes, which are often subject to negotiation. Our recommendations are to (i) not underestimate the time and effort needed to complete closing conditions (start preparing early to avoid delays!), (ii) use the National Venture Capital Association (NVCA) model documents as a baseline for standard conditions and (iii) flag and negotiate any unusual or onerous conditions as early as possible.
Key Considerations
Closing conditions may seem like boring legal technicalities, but they can unnecessarily delay or even derail your financing if mishandled. Here’s what to keep in mind:
1. Bring-Downs. Many deals require that your reps and warranties remain true at closing (ie. a “bring-down”). Make sure no material changes have occurred immediately prior to closing that could affect them and, if so, update the disclosure schedules accordingly.
2. Board and Stockholder Consents. Don’t assume corporate approvals easy and straightforward; confirm your board and stockholders are aligned and get signatures held in escrow to effectuate when needed.
3. Deliverables Checklist. Be meticulous about the tracking required closing deliverables and ensure they’re complete and ready to go.
4. No Ambiguous Conditions. Look for broad or undefined closing conditions such as no “material adverse changes” which give investors lots of wiggle room to argue and potentially walk away. Push for specific deliverables if possible, especially in volatile or uncertain times.
Why It Matters
Closing conditions are the final hurdle before your financing becomes real, so don’t ignore them until the last minute. Otherwise, you risk a messy closing that could raise serious concerns with your investors just before closing. Plan ahead by handling them diligently, stay organized and keep them as a negotiating point from the beginning, and you will help ensure a smooth closing.
