Note: This is not investment or legal advice.
Once you’ve decided to invest in a startup, how do you actually finalize the deal? This morning, I’m signing and wiring for a new investment. Here’s how it works…
1) Term Sheet. The lead investor generates a term sheet. This document tells us how the investment round will work.
The term sheet will say how much money is being invested in the company. It will also tell us the valuation and the type of financing (SAFE, priced round, etc.).
Angel investors don’t lead rounds or generate term sheets. As an angel, deals are “take it or leave it.”
2) Review and sign docs.
When the financing is ready to close, you get a ton of documents to sign. These generally include stock purchase agreements, rights of first refusal, etc.
In total, you’re looking at over 100 pages of dense legalese. I generally skim it looking to confirm key details, like the amount of money raised and the post-money valuation.
Many early stage financings are done using a SAFE. This is a standard document from Y Combinator’s website. The SAFE saves you time and legal fees compared to drafting a more complex agreement.
If the financing is done with a priced round, most startups use standard documents from the National Venture Capital Association (NVCA). Like the SAFE, using standard docs saves time, effort, and money.
I usually get these documents as a Docusign link. I review them and sign them online.
3) Wiring.
Given how complex the whole process is, you could almost forget the entire point: getting cash into the startup! Let’s take care of that final, all-important step.
You usually make an investment in a startup using a wire transfer.
Most banks can do this. Some even provide free wire transfers, which is really nice if you make a lot of startup investments like I do.
The startup will give you its wiring info. This includes the bank name, account number, etc.
I go to my bank’s website, initiate a wire transfer, and type in the info the startup gave me. Whoosh, money heads from my account to theirs.
And we’re finally done!
It would be nice if you could do this with an ACH. Every bank can do those, generally free. But in the vast majority of cases, wiring is the only option.
Wrap-Up
Meeting startups and deciding to invest in them is fun! Reviewing legal docs, signing, and sending wires is kinda boring.
But it’s critical.
Once you’ve agreed to invest in a company and they’ve sent you the signing and wiring info, you should always sign the docs and wire right away. I try to wire same day if at all possible.
Being easy to work with helps your rep as an investor. It’s also just being a good human.
Okay, off to find more startups!
What questions do you have about investing? Leave a comment and let me know!
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