By
Tam Pham
February 23, 2023
Imagine a venture capitalist just told you they want to invest in your company.
Time to break out the champagne, right?!
Well, not quite.
There’s a bit of work left to turn that commitment into an investment.
From a recent episode of Uncapped Notes, Eric Bahn and Janel Spilker break down all the steps between the verbal commit and the money actually hitting your bank account.
Here’s what you need to know.
Have these documents ready
When you accept money from a VC, there’s a checklist of things that they need to verify before they're legally allowed to wire money to you.
Things like…
- Certificate of incorporation
- Bylaws
- Board consents
- Founder stock purchase agreements
- Option plans
- 409a valuations
- Cap tables
And more documents. This can get even more complex as you raise more money. We recommend working with an attorney to make sure everything goes smoothly. #WeAreNotLawyers
VCs may run a background check
It’s pretty common for VCs to run background checks on founders before investing.
We want to know if they have a criminal background or any active lawsuits that could put the business at risk.
VCs might also run an OFAC background check. This is when we run the founder’s name through the Treasury Department database.
We want to make sure the founder isn't aligned with terrorism or on any ban lists, sanctions list, etc.
If you have a common name, this might trigger a false positive and you may need to clear things up with your VC.
VCs will ask you to sign a side letter
A side letter is a document outside of the SAFE / convertible note that outlines additional rights.
You’ll likely see these two from VCs:
- Pro Rata Rights — this gives the VC the opportunity to invest more capital into your company in future fundraises.
- Most Favored Nation Rights (MFN) — this means if a different VC comes in later and successfully negotiates a lower valuation than the previous investor(s), the previous investor(s) can also reset their valuation to the lower amount.
When Eric was a founder, he felt comfortable signing these side letters because he wanted to make sure that he was being loyal to his earlier investors.
There are other things that can happen in side letters, too. We recommend reviewing everything with an attorney before you sign.
Call your VC to confirm wire details
This might sound strange… but you will actually need to call your VC to verify your details.
No, texting ain’t gonna cut it.
Don’t freak out but…. fraud and scams can take place when it comes to wire transfers. So hop on the phone and verify your routing and account number.
Please actually do this.
Beware of VCs who don’t actually have money
This is not a good look for VCs… but there are investors who verbally commit to an investment, but have no money.
This could be because the VC is still raising capital themselves.
So a VC can tell you they’d love to be your first check in for $100,000. You go through the entire process outlined above.
And then you’re waiting… for weeks. Months. Maybe even an entire year.
You call your VC, “Where’s the money??”
Then the VC may say something like, “Well as you already know [aka they never told you], we are still in the process of raising our first fund. Once we can call down some money from investors, we will deploy it to you. Just be patient.”
This is a big trap and one that Eric didn't know about until he got into venture.
PSA: At Hustle Fund, we always wire as quickly as possible because we think this is super disrespectful.
What to look for to catch signs of these annoying practices?
Please please please: conduct investor reference calls.
This can be a quick phone call with other founders or people connected to this investor. 10 minutes of due diligence can potentially save you 10 years of headaches.
The second thing you should do is seek clarity from VCs with these questions:
- When did you raise capital?
- Are you still in the process of fundraising? If so, when is your anticipated first close or second close?
- How long should we expect from your commitment to receiving a wire?
- How much money has been called by your current fund?
Bottom line, getting a verbal commitment is just the first step toward actually receiving the money. Get your documents in order, confirm your wire details, and do your due diligence.
If you have any questions about the fundraising process, let us know and we might answer your Q in a future issue of The Founder Playbook.
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