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Sunday, August 28, 2011

Is the Financing Really Done?

The term-sheet was completed weeks ago.  You and the new investors have just executed the final deal documents and a syndicate will be making an investment in your company.  A closing date has been selected.  You are soon to meet with your current investors to get the approvals you need in order to close.  Life could not be better, right.  Not so fast!  Sure you have contractual arrangements, but what if the investor group says they changed their mind. 

There are always discussions where investors express interest in investing in your NewCo. They say they want to invest, but never seem to get around to it.  Many times entrepreneurs say, NewCo is in extensive discussions with an Angel or a group and the money is coming soon.  At least in these cases, the agreements have not been signed and one can expect the investor may not invest.

In real life, even with signed deal documents, the investors can back out if they desire to do so.  They do not even need to use a clause in the agreement to abandon the financing.  They just tell you they are not giving you the funds.  Talk about a downer!

Even if you get the funds, what if they want the funds returned and take you to court to get the money back.  The reason, may be simply they believed something was to happen, they realized it would not.  The investors changed their mind and no longer believe the investment sound.

Keep in mind that investors go by the Golden Rule; “They Have the Gold, and They Set the Rules.”  In the case they ask for the funds back, you can use their money to fight in court.  In the case where they refuse to go through with the deal, you likely do not have the funds to go to court to enforce the agreement.  NewCo is hurt in either case.

The whole point is that a financing is not done until you close and have spent all the money.  You must always be on guard and expect the unexpected.  From experience, I can say that standing in front of 60 current investors and canceling the shareholder meeting until a date uncertain is no picnic.  Negotiating with the investor pool to get them to close in such a case is awkward at best.  It may even require help from stronger friends!

The bottom line is, don’t get arrogant when you are about to close on a financing; be happy, be excited, be grateful, but cautious.  If you close and get to keep the money, don’t get too cocky; be vigilant and cautious.  You never know when something will happen to take that smile off your face.

  Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon