In our last installment, we had gotten the money for our business - hooray! And we were working through the legal and accounting issues and changes that might be required in order to actually get and use the capital from investors. Again, a special thanks to the FizzLaw team for connecting us to some great attorneys to answer these questions.

How long could the typical process to obtain the money take? What might hold it up?

According to attorney Tammi Franke of Fitzgerald, Hewes & Franke LLP, “Once a company has the green light from an investor, it will take at least a month to get the documents drafted, negotiated and closed.  More time if there are any hurdles – e.g., prolonged negotiations or issues with due diligence (the investor’s examination of the company’s financial and corporate documents).” Attorney Jay Parkhill cautioned “ The road from signed term sheet to closing of the investment could take 2 weeks or it could take 6 months.  One to two months is fairly normal.” He noted a number of variables that could affect timing:

• A good, clear term sheet will help avoid missed communication as the definitive documents are prepared.  Multiple revisions and renegotiation of documents are guaranteed to slow deals way down.
• Careful record keeping from day 1 of the company will make the due diligence period go quickly.  Chasing people for signatures slows things down a lot.
• The transaction documents are long and complex. They take time to read carefully, which takes everyone’s attention away from running the business.  Entrepreneurs should understand that raising money is a near full-time job. They need to take time out from sales, engineering and other aspects of running the business in order to manage the financing process.  The more they are able to carve out time for that, the more quickly documents can be turned and steps toward the closing completed.

Is there a “typical cost” for creating the documents for an A round of investment?

Franke  said “No.  It will depend on the amount of financing, the type of investors, the type of company and its intellectual property, the amount raised, the age of the company and many other factors.  However, if you search on the internet, you’ll find sources that say $30 – $50k is typical.  There are more boutique law firms now with expertise in this area who are more cost-effective than the mega-firms.  Also, there are more model (NVCA, TechStar) documents available, which can reduce negotiation and preparation time.”

Parkhill added “The normal cost range to close a seed financing runs from around $5,000 – $20,000 if the company has a complicated history, investors negotiate terms or things don’t go completely smoothly. Series A financings, especially for VC investors, involve more documents and frequently lawyers for the investors.  Costs here can also vary widely.  I would consider $15,000 to be achievable but only if all the facts line up perfectly.  $20,000 – $30,000 is a fairly typical range, although I have seen cases where company counsel’s fees went to $50,000 or even $100,000.

Bear in mind that the company will pay the legal fees of investors’ counsel as well.  Company counsel usually does the heavy lifting in the transaction so investor counsel fees should be somewhere between 1/3 – 1/2 of company counsel’s fees.”

So there you have it. It can take a month or more to come to terms, look at all the paperwork, and actually obtain the investment. Also, you should consider your own company’s legal fees as well as those of your investors when calculating the actual cost of the money you’re raising.

If you have questions, ask them in the comments, and we’ll answer them in another post.