Day After the Raise

Learn more about this topic at our Panel Event, Day After the Raise on Thursday, Sept. 22 at 10 a.m moderated by Sarah Boulden, Managing Partner of Silicon Legal’s Denver office, with panelists including Peter Volz, Julie Penner, and Shail Mehta.

And don’t forget to stop by the Silicon Legal sponsored Happy Hour, Tuesday, Sept. 20 at DSW HQ to say hi and meet members of our team and the Silicon Legal booth at the Job Fair on Wednesday, Sept. 21.

Day After the Raise

Congratulations! After countless pitches, navigating through a thicket of lawyers, reading thousands of pages of legal documents (what type of person could possibly write those things?), and wrangling investors, you have finally closed the Big Round. Now you have the runway needed to take your company to the next level. As a first priority of business you will . . . wait, what will you do?

Whatever the structure of the round—a debt financing, a SAFE round, or a preferred financing—raising outside funds is a huge milestone. It is often a validation of your business idea and a wake-up call that now is the time to really get to work.

Below is some common advice we see when working with founders.

How to Deploy Capital

The most efficient use of funds depends on the nature of the company’s business and the amount of capital it has raised. However, the following list covers a few important matters to keep in mind when determining how to deploy capital.

• Hiring: Growth and scaling is often connected to the people who you hire. Capital gives a company the ability to find the rest of its management team, bring on a sales team to sell its product, or hire the engineers needed to fully develop its product. Founders should think about what types of roles are necessary to bring their company to its next stage of growth.
• Consider Burn Rate: My paternal grandparents started a dairy farm in rural Alabama. When I was young I asked them how they created a successful business. My grandma responded, “make sure you have more comin’ in than goin’ out.” That might be over-simplistic, but the core principle remains: understand your costs and what is needed to get to profitability. Are you default alive or default dead?
• Lean on Advisors: My maternal grandparents were from Puerto Rico. Once I asked my grandpa advice about getting over my shyness when asking questions in school. He responded, “chico, a veces necesitas ser un PITA.” (sometimes you need to be a pain in the . . .). They are called advisors for a reason—be willing to reach out to your network, expand your network, and learn from the (sometimes painful) lessons that others have learned before you.

Legal Considerations

More lawyers? It can be true that with mo’ money comes mo’ problems and all those pieces of paper do create a new set of legal obligations for the company. Below are some immediate things to keep in mind after raising a round of funding. Good counsel can help you navigate the often complex obligations that come with raising funds.

• Option Grants: After closing a financing, founders are often ready to issue options to existing and new employees. Due to tax laws, after raising funds startups should have an independent valuation firm determine the price of a company’s common stock—commonly called a 409A valuation report. It often takes a few weeks for the 409A valuation report to be completed so you will want to start that process as soon as possible.
• Board Meetings: If you have appointed new board members as part of the financing round, then it is time to start holding formal board meetings, which are commonly held on a quarterly basis. There are a lot of great resources in the startup ecosystem around how to hold an effective board meeting. However, you will want to work closely with your attorney to develop the right processes and make sure board approvals are documented in a way that makes them legally effective.
• Information Rights: Preferred stock financings often including granting certain investors “information rights.” This creates a contractual obligation for a company to provide certain investors with specific financial information about the company on a set schedule. You will want to be aware of these obligations and comply with them. One of the most common mistakes founders make is not keeping investors in the loop—these are the people who can be your biggest supporters, teachers, and can continue to provide monetary support as the company grows.

If you’ve raised your first round of financing, congrats! Take a nap, go out for a nice dinner, do something to celebrate. Once you’ve had a chance to re-charge, it is time to get back to work and learn lessons from other founders and advisors that will help your company in the weeks, months, and years ahead.

***

Author Charlie Clark is a Denver-based associate at Silicon Legal Strategy. Charlie’s practice focuses on advising emerging growth companies on a broad range of matters throughout their life cycle, including formations, financings, mergers and acquisitions, and general business and governance matters.