Stepan Khzrtian

Participating preferred allows the investor to “double-dip” when stockholders are being paid out after a liquidation or exit. First, the investor gets paid an amount equal to their investment amount times the liquidation preference multiple — before the common stockholders are paid. So, if the multiple is 1x, the investor gets paid out as much as they invested in the first place. Then, the investor also participates in the distribution of the remaining proceeds in proportion to their ownership percentage — along with the common stockholders. So, if the investor owns 20% of the company, they are paid out 20% of the balance that remains after they got their 1x multiple. As is evident, participating preferred is very investor-friendly.

The startup's counsel should be the one coordinating and driving forward the process, like a conductor. And a closing checklist goes a long way in making sure everybody is on the same page. The closing checklist lists: - every action to be taken, - the person that should take that action, - the party responsible for ensuring that action is taken, and - the status For example: - action: signing the Preferred Stock Purchase Agreement, - by whom: investor X, - responsible party: investor counsel - status: complete

Here's your standard Series Seed closing checklist: 1) Amended charter filed with the Delaware Secretary of State 2) Board and Stockholder consents approving the seed round are duly adopted 3) Financing documents are signed: - Preferred Stock Purchase Agreement - Investors' Rights Agreement - Right of First Refusal and Co-Sale Agreement - Voting Agreement 4) Additional corporate documents are provided: - Compliance Certificate - Secretary Certificate - Certificate of Good Standing 5) Additional agreements/letters are signed: - Indemnity Agreement (with directors) - Management Rights Letter (with investors) 6) A legal opinion is provided

If due diligence is a bunch of dangling yarns, the closing is the moment those are all neatly aligned and tied into one knot. The lawyers will start collecting signed signature pages in advance of the closing. When all the preconditions to closing are satisfied (or waived), the signature pages are "released" (the documents are considered officially signed), the investors wire the money, and the company issues the shares.

When you sign the term sheet, you want to get the funds in your account asap. Prepping for due diligence helps you do that: 1. Start early. Have your data room set up and good to go the moment you start fundraising. 2. Plug in any gaps in your legal paperwork in advance, before due diligence starts. 3. Keep things super-organized. It's going to leave an impression on your investors.

Here are some important boxes to check off: 1. Corporate documents: a) Certificate of Incorporation b) Bylaws c) Board consents d) Stockholder consents 2. Stock documents: a) Stock purchase agreements and 83(b) elections b) Stock option agreements c) Equity Incentive Plan 3. Hiring documents: a) Offer letter for all employees b) Consulting agreement for all consultants c) Advisor agreement for all advisors 4. IP documents: a) IP agreements with all your hires b) Trademark applications and registrations c) Domains d) Patents 5. Material agreements a) Contracts with customers (e.g., SaaS/Sales Agreement) b) Contracts with vendors (Master Services Agreement) 6. Financing documents a) SAFES or convertible notes b) Former priced round docs