Unintended Consequences of a Long Additional Closing Period

Some financing rounds close on one specific day. That is, all investors fund the full investment amount of the financing round on the same day. This is usually the case when a financing round has a small number of investors who can coordinate with the startup on a closing date (wires, exchange signature pages, etc.). As the number of investors in a financing round increases, herding all such investors to close on one exact day becomes increasingly difficult, if not impossible.

To facilitate closing a financing round with multiple investors, the deal can be structured to allow the startup to hold multiple closings. The first such closing is known as the “initial closing” and subsequent closings are called “additional closings.”

The deal documents will generally fix a date that is the last day a startup can hold an additional closing. This “additional closing period” usually falls in the 30-90 day range, measured from the date of the initial closing. But the additional closing period can be longer (i.e, 120 or even 180 days). Investors do not like long additional closing periods primarily because it can allow late-to-the-table investors to invest on the same terms they originally did — 30, 60, or even 90 days later.

The general consensus is that a longer additional closing period is a company-favorable term. The startup is simply allowed to close certain investors who are ready, and then work on closing the rest of the investors in the short period thereafter.

However, elongating the additional closing period could tempt investors to wait or otherwise hedge investing until the latter part of the additional closing period. They may think “Why would I invest now when I can invest X months down the road and get the same terms?” Since optics and signaling tend to matter, a very long additional closing period may signal lack of demand to finance a startup (even if it’s not the case). Of course, any investor choosing the wait and hedge approach would balance it against the probability that the round closes without them.

The wait and hedge approach is problematic as a startup needs the investment ASAP. It’s likely the startup has been working on obtaining financing for 6+ months prior to the date of an initial closing. Thus being delayed another 60-90 days can be brutal.

Determining a proper additional closing period, if any, is very situational. If your startup already has a sufficient amount of money lined up, then extending the offer period beyond 30 days may not be necessary. Though, if you are still very far from your goal or have a very large number of investors, it may be essential to have a long additional closing period. Regardless, extending the additional closing period for as long as possible just because a startup can may have negative consequences.

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