How Do I Do Multiple Closings for an Angel Round?

Q: How do I do multiple closings on a single round work? In our case, we have an investor wishing to give us  headstart, certainly I imagine not an uncommon case in friend and family scenarios, though here we’d have multiple rounds of angels, without kicking up the gears to flush out a full seed round with other investors before that money changes hands.

A (Brad): There are several ways to do this.  Let’s break it into two cases: #1: You are doing a convertible debt round.  #2: You are doing an equity round.

#1: Convertible Debt: This is the easiest case.  For a convertible debt round, you can keep it as simple as issuing a promissory note for each investor.  This promissory note can contain any special conversion terms, including what happens on a qualified financing (including the definition of the qualified financing), what happens on a sale of the company, and what happens if the company fails.  You can do as many closings as you want by simply issuing a separate promissory note for each investor.

#2: Equity Round: The best way to do multiple closings on an angel equity round is to raise the early money using the convertible debt approach above with an automatic conversion into a pre-negotiated equity financing once a certain amount of money is raised.  Let’s say you are planning to raise $500k and your early investor is willing to do $100k of it at a $1.5m pre-money valuation.  You can negotiate the equity terms with this investor, issue a promissory note for $100k to get that money into the company, and then agree (contractually or not) to do the full round once you’ve lined up the $500k.  You do run the risk that either (a) you can’t raise the full $500k or (b) some of your later investors will want different terms.  If you have a good relationship with the first investor(s) you can usually manage this by including them in the process.  You can also put a "most favored nation" clause in the promissory note to adjust their conversion features to match whatever the financing ends up if it is more favorable to them than the terms the negotiated. 

An alternative approach to #2 is to negotiate all the equity terms with the expectation that you’ll have multiple closings on the equity round.  Then, do a first closing with whatever investors are lined up and have a fixed length of time (typically 60 – 120 days) to raise more money on the same terms.  Again, you should be conscious of the idea that you might have a new investor want better terms – since this is your early angel round, you should consider including a most favored nation clause so the investors that committed to you early get the same deal as later investors in the same round if the terms happen to change.

  • pwb

    Could you keep it simple and just take the money as it comes?

  • Could you keep it simple and just take the money as it comes?

  • Kent Cavender-Bares

    Brad–curious what you recommend if a company does two batches of convertible notes that are separated by about a year. We have a ratchet on discount after 12 and 18 months and a 2-year maturity, but no cap. Early noteholders probably wouldn’t find it fair for new noteholders to be on the same calendar for discounts–that could make them feel that they are not getting rewarded (bigger discount) for getting in early. Yet, different discount schedules creates a scenario where, if the company goes sideways or worse, that early noteholders may have converted to equity when their notes matured whereas the late noteholders still hold notes and would have priority during a fire sale. Thanks!

    • Yup – it can turn into a mess. Ultimately you want to convert this into equity -hopefully using a financing to do that.

      • Kent Cavender-Bares

        Totally agree–working hard to get to that equity round! Think we’re closing in now, with great milestones in the bag. Also, came up today with a decent solution to the multiple closes, by compressing things a bit on the second set of notes so that the maturities will line up.