Can you have multiple closings in a convertible note or SAFE financing?
Takeaway: Yes, most convertible note and SAFE financing rounds sell multiple notes and SAFEs. There is generally pretty wide latitude to sell additional notes and SAFEs so long as you stay under the limit the board of directors approved.
Convertible promissory notes and Simple Agreements for Future Equity (SAFEs) have become popular financing instruments for early-stage startups, providing flexibility and simplicity for founders and investors. In this post, we will explore the concept of multiple closings in a convertible note or SAFE financing, the benefits and potential challenges associated with this approach, and how it can be executed effectively.
Multiple Closings: An Overview
In a financing round involving convertible promissory notes or SAFEs, multiple closings refer to the process of accepting investments from different investors at various points in time during the fundraising period. Startups usually have multiple closings in their convertible note and SAFE financings, though there is typically an outside date after which they cannot sell any more. This approach enables startups to secure funds incrementally as they become available from investors, rather than waiting for a single, lump-sum investment.
Benefits of Multiple Closings
Flexibility: Multiple closings provide startups with flexibility in their fundraising efforts. They can accept investments from different investors as they become available, without waiting for one large investment to materialize.
Expanded Investor Pool: Multiple closings enable startups to work with a broader range of investors, potentially attracting more funding sources and expertise. This can help diversify the startup's investor base and increase access to valuable networks and resources.
Incremental Funding: By securing funds incrementally, startups can better manage their cash flow, using the funds as needed for operations and growth. This can help startups remain lean and agile in their early stages.
Simplified Negotiations: In many cases, the terms of convertible promissory notes and SAFEs are standardized across multiple closings, which can simplify negotiations with investors and reduce legal costs.
Challenges and Considerations in Multiple Closings
Dilution: With each additional closing, there is the potential for increased dilution of founders’ and existing investors' ownership stakes. Founders should carefully consider the potential impact on ownership and control when raising funds through multiple closings.
Administration: Managing multiple closings is typically a low lift but can sometimes be administratively complex, as startups must maintain detailed records of each investor, investment amount, and associated terms. Proper organization and communication are essential to avoid confusion or disputes.
Legal Compliance: Startups must ensure they comply with all applicable securities laws and regulations when conducting multiple closings. This may require seeking legal counsel and adhering to strict disclosure and reporting requirements.
Implementing Multiple Closings Effectively
To implement multiple closings effectively, startups should consider the following best practices:
Set Clear Timelines: Establish clear timelines for the fundraising period, specifying the start and end dates for each closing. This helps create a sense of urgency and provides clarity for both the startup and investors.
Maintain Detailed Records: Keep accurate and up-to-date records of all investments, including investor information, investment amounts, and terms. This ensures transparency and helps avoid potential disputes.
Communicate Regularly: Maintain open communication with investors throughout the fundraising process. Provide updates on progress, milestones, and any changes to the financing terms or conditions.
Seek Legal Counsel: Consult with legal counsel to ensure compliance with all applicable securities laws and regulations. This will help protect the startup and its founders from potential legal issues when issuing convertible notes and SAFEs in multiple closings.
Conclusion
Multiple closings in a convertible note or SAFE financing is often a beneficial strategy for startups. It provides the flexibility to raise funds in increments as needed, and allows for the potential to bring on additional investors over time. However, it is crucial to be mindful of the limit approved by the board of directors when selling additional notes and SAFEs. It's also important to remember that while these instruments provide simplicity and flexibility, they also require planning and execution. As with any financing strategy, it is advisable to seek professional counsel to navigate the complexities and ensure the best outcomes for your startup.