Ten Things You Should Do AFTER Closing a Priced Round Financing

Congratulations, you’ve closed your first Preferred Round Financing!  Closing an investor led, priced round financing is a huge milestone in the life of a startup company, and most founders are relieved to finally complete a financing and get back to focusing on their product or business.

While most of the “hard work” of a financing is done after the initial close, it doesn’t mean there aren’t important tasks for the Company and their counsel to address after the closing.  Below are some things that a company should consider addressing post financing, including post-closing requirements typically agreed to in a financing, as well as items that may not be requirements, but may make sense for a company to consider.  

Also, for clients of Inceptiv, we provide post-closing checklists to help them stay on top of these items.

1. Securities Filings

Private companies issuing stock (or any other security) to investors in the United States can only do so by registering such securities with the US Securities and Exchange Commission (SEC) or alternatively (to avoid such registration which is costly and time consuming), issue such securities pursuant to one or more applicable securities exemptions under the US Securities Act of 1933 (the “33 Act”).

Private companies issuing preferred stock to investors in an investor led, priced round financing, typically do so under a specific exemption under Rule 506(b) of Regulation D of the 33 Act.  To qualify for such exemption, in addition to meeting the requirements of such exemption (which your counsel should have confirmed prior to the close of the financing round, but requires that there has not been a general solicitation of investors, that investors have a pre-existing relationship with the issuer or its representatives, and that the investors qualify as “accredited investors” as defined under the 33 Act), the company (as issuer) must file a Form D within 15 days after the first sale of any securities in the offering. 

In addition, some states also require a separate filing for offerings within such state (eg California and New York are examples).  

You should always check with your counsel to discuss any securities filings that may be required after the closing of your financing.  

2. Updating your cap table management software

Most companies use Carta, Pulley, Shareworks or other cap table management software to maintain their cap table, and typically investors requiring companies to maintain such software even before the closing of a financing, to help streamline information regarding the capital structure of a company.  

Post closing, the company (or most likely company’s counsel) will need to update the cap table to add information regarding new classes of shares created and issued, conversion of SAFEs or convertible notes that may have converted as part of the round, as well as increases to the employee stock option pool.  While there is typically not a set deadline to complete these tasks, investors will typically look to get evidence of their share issuances via the company’s cap table management platform soon after the closing, and updating the platform will also allow for issuance of a new 409A report (as discussed further below).  

3. Generating and approving a new 409A Valuation Report

After a financing has closed, companies will need to generate a new 409A Valuation Report.  The report will reflect the likely change in valuation resulting from the financing, and will replace the company’s prior 409A report, which will have been rendered invalid after the company’s receipt of a new financing term sheet.  

Companies using cap table management platforms such as Carta or Pulley can generate a 409A through such platforms provided they are under the appropriate paid plan.  Such platforms will typically solicit information such as updated financials, financial forecasts, information regarding the financing round (which should already be in the platform if it was updated post financing), as well as information or narratives regarding the prospects of the company generally. 

For companies not using Carta or Pulley, there are various traditional valuation and accounting firms who can generate a report, which usually take a couple of weeks to complete.  One software based service is Initio Software (which acts much like the online 409A services that Carta or Pulley provide, but is not tied to a specific cap table management platform).  Note that while most companies already using Carta or Pulley typically generate their 409A reports through such platforms, there are reasons why some companies decide to use an outside valuation report (typically for flexibility or other reasons).  

Finally, once generated, a 409A report must still be approved by the company’s Board to be valid, and is usually valid for a year from its effective date under the 409A safe harbor rules, unless some intervening event renders it invalid.  

4. Approving Options

A valid 409A report is required for the issuance of options.  However, from the time a company has received a financing term sheet through the time a new 409A valuation report is approved, a company cannot issue new options (as a valid 409A report is needed to set the exercise price for options).  

As a result, once a 409A report is approved, there is typically a backlog of option grants that a company will need to have approved, whether they are options promised prior to the financing, or options for new employees and contractors hired or retained during and after the financing.  

Therefore, it typically makes sense for a company to have the Board approve both the new 409A report and any pending options in the same consent.  If you have any questions on this process, you should discuss with your counsel.   

5. Purchasing D&O and other Business Insurance Policies

Institutional investors, in particular those that take a Board seat at the company, require that companies purchase and maintain Directors & Officers insurance (“D&O insurance”) to insure against shareholder lawsuits against the Board.  

The requirement for such D&O insurance coverage is usually negotiated during the financing and detailed in the financing documentation (in NVCA style docs, its usually a post-closing covenant in the Investor Rights Agreement), and usually includes a timeframe (eg 60 or 90 days post initial closing) for the company to comply.  

Companies should be sure to place insurance that meets the investor requirements in the financing documents – the company should cut and past the relevant language in the financing documents and send to the company’s insurance broker to be sure it complies.  

In addition, it may be a good time for the company to also consider discussing with its broker purchasing other types of business insurance, such as CGL (Comprehensive General Liability), Property & Casualty, E&O (Errors & Omissions) and other types of insurance that are relevant to the type of business the company is operating, especially given the company may have raised a large amount of money which could make it more of a target for lawsuits, frivolous or otherwise.

6. Adopting an Anti-Harassment Policy/Employee Code of Conduct

A common investor request in a financing is a requirement that a company adopt an anti-harassment policy and/or an employee code of conduct within some timeframe after the initial closing of a financing (usually 60-90 days).  

Usually for an early stage startup, the adoption of an anti-harassment policy and/or an employee code of conduct is done in conjunction with adopting an employee handbook.  

While most early stage companies typically don’t have a dedicated HR person to draft or create an employee handbook or anti-harassment policy, for companies utilizing common payroll services such as Paychex, ADP or Gusto, those services typically offer template handbooks and/or employee handbook builders to allow companies to create and implement a handbook and employee codes of conduct.  

Companies that have questions on this should consult with their counsel. 

7. Implementing Data/Cyber Security Policies and Procedures

Another common request investors have in a financing is a requirement that a company adopt and implement data or cybersecurity policies and procedures within some timeframe after the initial closing of a financing (usually 180 days or longer).

Companies will typically rely on their internal CTO or head of engineering to implement these policies, although to the extent companies have questions on compliance with data privacy or other laws, they should contact their counsel, especially those that have employees or customers based in the European Union (EU) and may be subject to the General Data Protection Regulation (GDPR) in the EU, or those based in California and/or have a significant number of users based in California and therefore are subject to requirements of the California Consumer Privacy Act (CCPA). 

8. Retaining an Accounting Firm or Bookkeeper

A standard requirement in financing documents is the grant of “information rights” to some or all of the investors in a financing (this is typically limited to investors deemed “Major Investors” under “NVCA” style financing documents, or who have separately negotiated for such rights under an investor side letter or Management Rights Letter).  

The typical requirements call for the company to provide investors with periodic financial reports and statements, either on a monthly or quarterly cadence, along with information regarding the company’s cap table.  In addition, information rights may also require that the company provide to investors an annual budget, prepared within some time frame before or after the end of the calendar year, that must be submitted for approval (by the Board or, in some cases, the relevant shareholders).  

Early stage companies often don’t already prepare such statements on a regular basis, and so will need to retain an internal bookkeeper or retain an outside CFO/accounting firm to prepare such statements.  There are a number of firms that support startup companies, and our firm (Inceptiv) works with a number of outside accounting firms and are happy to provide recommendations.  

9. Implementing a Cash Investment Policy

While in some cases investors and/or financing documents will require a company to implement a cash investment policy, regardless of whether explicitly required, companies should strongly consider adopting and adhering to a cash investment policy.  

A cash investment policy is a set of guidelines, adopted by the company and approved by the Board, which governs how, where, and in what types of accounts or securities, the company can deposit or hold the cash they have raised in a financing.

Prior to the first major financing, most founders are struggling just to meet expenses and don’t necessarily have to think about managing millions of dollars.  However, that quickly changes once a large financing closes, and founders now have the “high class” problem of understanding how to manage the cash it has received. 

Companies that have an accounting firm retained or outside CFO or bookkeeper and discuss putting in place a proper cash investment policy.

10. Consider Putting in Place a Debt Facility

There is an old saying that banks only lend money to those who don’t need it.  While apocryphal, the saying does point to the fact that it is generally much easier to engage a bank and put in place a term facility or other loan facility while the company is still flush with cash.  

While it may seem strange to start asking for a bank loan facility immediately after raising a large financing round, in many cases it can be a smart strategy for a company – putting a facility in place can extend the company’s runway, and allow the company to secure better terms than if it tries to secure a facility when the company’s cash reserves (and prospects) are lower.  

There is typically a cost in putting a facility in place (initial and annual fees, costs to negotiate the loan agreement, and interest on borrowed amounts), those amounts may be worth it, and in many cases, the company may not need to use it (and thus depending on the terms of the facility may not incur interest payments), but will have the piece of mind of knowing the facility is available to be drawn down upon if needed.