For an industry concerned with building the future, the actual process of raising money from venture capitalists is surprisingly outdated. Investors spend most of their day finding and working with portfolio companies on the bleeding edge. But once they’ve decided to invest and a term sheet is signed, after everyone finishes the high-fives, the lengthy process of actually closing the deal just begins. From there, it can be more than a month before the documents are signed and the money is in the bank, and founders are often left wondering what the legal teams are doing during that time, why it costs so much, and why it takes so long.
It doesn’t have to be this way
The truth is, if all of the people involved in a financing were locked in a room, and gave their full attention to closing the deal, you could have it done in one day.
The documents are drafted from standard forms and there is only so much variation required for the nuances of any specific deal. The negotiations are mostly well worn topics that can be quickly resolved by reasonable parties. And there are few, if any, diligence questions that can not be discussed and addressed in that time frame once materials have been gathered and reviewed.
But over the course of hundreds of venture financings, working across every major law firm and many of the best investors in the world, I have never seen a single financing done this way. The process is important, and the legal issues can’t just be ignored or dismissed. But we need new tools to work through those issues and handle the mechanical operation of running a financing more efficiently. This is our mission at Dealkit - we’re going to make venture deals better for everyone, from term sheet to closing.
How it works today
Today, once you’ve signed a term sheet, you are typically about four or five weeks away from closing. Four if everyone is working diligently and moving quickly. If you’re able to push the process down to three weeks, you’ve done very well. But what’s going on during that time? For a founder, there is not a lot of visibility because the process is mostly handled by the lawyers, and this can be a real point of frustration.
There are several work streams running simultaneously. After an initial kick-off call, counsel for the startup will begin drafting the definitive financing documents based on the term sheet. For a typical equity financing they’re almost universally done using the forms published by the National Venture Capital Association, and add up to around 150-200 pages of contracts. Once ready, they’ll share the drafts with counsel for the investors, and there will be some back and forth - at least one or two rounds of edits, each with several days of waiting in between. These are traded as MS Word documents via email, and stored in each lawyer’s separate document management system. To show changes, lawyers run PDF redline comparisons, saving comparisons locally and sending them via email. Opposite counsel either duplicates the effort to run their own comparisons or else trusts that the other side has acted ethically and sent accurate comparisons. There is no reliable version control or source of truth between the parties.
In parallel, investor counsel sends an information request for due diligence items that they would like to review. Every investor will want to review essentially the same materials for the same issues, but every law firm has a different form request list, and companies will have to assemble the information in the way requested. They’ll upload materials to a dataroom in varying degrees of disarray, and investor counsel will have to review the materials - checking to ensure the capitalization table is correct, looking for dangerous traps in contracts, making sure intellectual property is handled correctly. The issues are well known, but none of this is automated or assisted by technology.
Once the financing document negotiations and the diligence review are both done, you start moving towards closing, and there is some major administrative work to do. To this point, you’ve been working with your lead investor, but most financings will involve many smaller investors as well - my personal record is around 85 investors in a Series Seed. Whatever the number, all of the investors need to receive copies of the draft financing documents. And you will need to coordinate wire amounts, signatures blocks and timelines and answer any questions. With so many emails and manual steps, the opportunity for error is high. Then every investor needs to sign documents, and the signatures all need to be stitched together into a closing set. And you need to track which wires have been received and issue stock certificates via Carta or Pulley.
This is spread across MS Word, Adobe, your email, your signature platform and more - none of it is automated and every step takes much longer than it needs to, powered by highly paid associates at law firms. It’s a workflow we all go through every day, but nobody has taken the time to improve it with software. Great lawyers do make all of this better - they will be proactive in communication and work quickly - but their extra effort comes at a very steep hourly rate.
This process needs to be faster, standardized and automated
There are an incredible number of parts of the financing process that are currently done by law firms, but which everyone would prefer to be done by software. Dealkit plans to take on the following, to name a few:
- Preparing drafts of routine documents from forms
- Sharing draft documents with investors
- Running redline comparisons between document versions
- Gathering contact information and signatures blocks for investors
- Calculating internal splits between the different funds affiliated with an investor
- Requesting and sharing diligence materials
- Creating signature pages
- Sending signature requests
- Preparing the closing set
- Sharing wire instructions
- Filing documents with Delaware
- Obtaining good standing certificates
We can handle each of these jobs faster, more efficiently, with fewer errors, and for less money than the status quo.
If we succeed, we will cut the time to closing in half. Investors and startups will have real visibility into their financing process. Lawyers will be relieved from the administrative work that slows them down and detracts from their margins. Deals will close with fewer mistakes. And founders will happily spend less time fundraising and more time building their companies.
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