Can you have multiple closings in a Series A financing?
Takeaway: Yes, companies often have multiple closings in Series A financings. These closings typically have to occur within a certain period of time (usually 90-180 days).
When it comes to raising capital in a Series A financing round, the process can sometimes be lengthy and complex. One approach that startups can consider to facilitate their fundraising efforts is to have multiple closings. In this post, we will discuss the concept of multiple closings in a Series A financing round, its benefits, and the factors to consider when adopting this strategy.
Understanding Multiple Closings
In a typical Series A financing round, a startup raises capital by issuing preferred stock to investors in exchange for their investment. Typically, the startup and investors agree on the terms and conditions of the financing round, and the round closes once the agreed-upon amount of capital has been raised.
However, in some cases, startups may opt for multiple closings, which allows them to close the round in smaller increments as they secure commitments from different investors. Each closing represents a separate instance where the company receives a portion of the total capital they intend to raise, and the issuance of preferred stock takes place accordingly.
Benefits of Multiple Closings
Flexibility: Multiple closings provide startups with greater flexibility in their fundraising efforts. By breaking the round into smaller increments, startups can adapt their strategy as market conditions change or as new investors express interest in participating in the round.
Additional Capital: Multiple closings can help startups manage their fundraise more effectively by enabling them to access funds as soon as they are committed by investors. This can be particularly helpful for startups with significant operating expenses or those that are in the early stages of development and need immediate access to capital.
Broader Investor Base: Conducting multiple closings allows startups to engage with a wider range of investors or investors that need more time, which can lead to a more diversified investor base. This can be beneficial for startups that are seeking strategic investors or those that want to leverage the expertise and networks of multiple investors.
Factors to Consider
While multiple closings can offer several benefits, there are also factors to consider before adopting this approach:
Legal and Administrative Costs: Multiple closings may result in higher legal and administrative costs, as each closing requires the preparation of documentation and the involvement of legal counsel. Startups should weigh these costs against the potential benefits of multiple closings to determine if this strategy makes sense for their specific situation. The incremental costs associated with additional closings are much less than the costs to hold the initial closing.
Negotiation Challenges: Multiple closings can sometimes complicate negotiations with investors, as each investor may have different expectations and requirements. The most common issue that arises is how long the startup may sell additional shares. Investors that invest later can essentially be getting the same price for a safer investment. Startups should be prepared to navigate these challenges and work with their legal counsel to ensure that the terms of each closing align with their overall fundraising goals.
Conclusion
Multiple closings in Series A financing can provide startups with increased flexibility and access to capital, helping them to navigate the complex fundraising landscape more effectively. This approach also comes with some challenges and marginal costs. By carefully considering the benefits and potential drawbacks of multiple closings, startups can determine if this strategy is the right fit for their fundraising efforts and ultimately secure the capital needed to fuel their growth.