Increasingly, investment documents are incorporating rolling closes. A rolling close mechanism enables a company to complete part of the total investment round with one or more initial investors, whilst leaving the door open for the company to raise further money on the same terms.
pros and cons
Clearly, it is easiest to complete a transaction with all the investors in one single closing. Everyone signs the paperwork at the same time, the company is fully funded and all shares are issued together. But, in the current climate, investors are taking longer to complete their due diligence, and fund. In these situations, a rolling close mechanism allows companies to close some of the round and get cash in the door. Otherwise one small investor can delay the whole round and the company receiving vital cash.
how is it documented?
Typically, the subscription agreement signed by the initial investors will include language relating to the proposed rolling close. This would include a cap on the total amount that can be raised and, normally, a period of time to complete the process. The proposed issue of these additional shares will need to be excluded from certain provisions under the governance documents of the company which either (i) restrict the company from issuing new shares, or (ii) have pre-emptive rights on new share issues.
We have seen rolling closes dealt with in various ways, summarised below:
- each rolling close investor signs their own subscription agreement with the company, on the same terms as the initial investors. Of course, this means paperwork is duplicated, taking time to draft. Additionally, the follow-on subscription agreements may need to be tweaked, as most of the closing conditions in the original subscription agreement may have already been satisfied.
- each rolling close investor signs a deed of accession to the initial subscription agreement under which they receive the same rights as the initial investors. Subject to ensuring that there is no conflict between the documents, this is efficient and cuts down the paperwork.
- occasionally, we have seen a mechanism in the initial subscription agreement enabling rolling close investors to accede to the overall subscription by simply adding their signature to the original document. We think this is not particularly customary and it brings into question the valid date of the document. Therefore, best to avoid.
shareholders’ agreement and constitution
The other issue is the new shareholders’ agreement and constitution. All investors will need to accede to the new shareholders’ agreement on becoming a shareholder, and be happy with the adopted constitution. Whilst small follow-on investors generally invest based on what the lead investor has already negotiated, they may have their own minor requests. Founders will need to manage this process by either pushing back, or potentially agreeing to side letters to avoid amending the main document, which would require everyone to re-sign.
If a rolling close is likely to be required, founders should state this in the term sheet. The lawyers can then ensure the necessary amendments are built into the final investment documents. To cut down on the paperwork and admin, it is strongly recommended that the rolling close investors all complete on a single second completion date, rather than in dribs and drabs.
Finally, to avoid reaching out to shareholders more than once, a good tip is to ensure that your board and shareholder resolutions signed on the initial completion date approve the maximum amount of the capital raise, including the full amount of the rolling close.