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April 19, 2021
Picture the following.
You’re the founder of a growing start up making all the right noises. Your GMV is through the roof, or platform engagement figures show steady improvement and the company is showing all the right signs for future growth.
As the founder, you’ve brought the company this far and now is the time to raise some capital and invest it in the business to fuel your expansion plans. Bigger sales and marketing teams, geographical expansion, better tech resources – the wish list can go on.
Raising capital also doesn’t prove difficult. You have a stellar team (typically high on the priority list of VCs), your target market is ripe for the taking. You have a line of investors waiting to give you the necessary capital.
Yet, the only thing you have against you is, Time. You need money in the bank in 6 weeks. VCs assure you that is enough time and get the ball rolling.
Fast forward 8 weeks into the process, you’re yet to sign the final documents. What went wrong?
Well to start, many things could have, but nothing really stood out when you first started. And when the lawyers told you compliances could be a stumbling factor, you dismissed it. How could something as dry as compliances stall the process?
Where does compliance fit into the funding process
A typical funding round consists of four stages – negotiation of terms; due-diligence of the investee company; formulation of transaction documents; and finally, transfer of funds to the investee company.
Once the term sheet is finalized, the due-diligence begins. During this phase, scores of lawyers work to ensure that all past compliances of the company are in order and that there are no legal exposures that may affect the company adversely. Generally, it becomes an arduous task to trace all applicable compliance requirements and then review them for deficiencies, which are then addressed to regularize the business of the company.
After the investors have been satisfied with respect to the investee’s existence as a valid legal entity which is not in contravention of any law in force for the time, the transaction documents are drawn up. – Shareholders Agreement (SHA) and the Share Purchase Agreement (SPA).
During the entire process, it is generally accepted practice to have the due-diligence run parallel to the drafting of transaction documents as a time-saving measure. However, due-diligence may prove to be the most time-consuming process, especially where the founders, or more commonly, the investors, insist on the completion of the due-diligence before the transaction documents are drawn.
The due diligence phase begins with the sourcing of documents from various sources. Tax filing, corporate law filings, labour law filings. If operating in a regulated sector then other compliances may be applicable – e.g. RBI related obligations. Here, the transfer of documents may take a considerable amount of time, during which the process is stalled. Once the documents are eventually received, they are painstakingly reviewed to ensure veracity and accuracy. The review process may reveal issues that may require remedying and re-filing. The review and correction phase only adds to the delay in the funding process. Finally, for the investee company, it distracts their resources from focusing on the business of the company over having to worry about sourcing and collating all regulatory filings and submissions.
Automating compliances can speed up finding rounds by over 40%
To put it bluntly, as a founder, taking compliances seriously should be high on the agenda. But in reality compliances probably fall outside of the top 10 fires you have to fight on a daily basis. So what then can be done about this?
At Quant LegalTech, we have worked with law firms where we have witnessed funding rounds close as fast as 3-4 weeks – an almost 40% faster closure time. In majority of the cases, shortened due diligences was the single most important factor that allowed for this speedy closure. This was possible only because the company had all compliances and contracts in place.
In the next article I will write about how digitizing your contracts adds an additional layer of transparency and efficiency to your business.
For now, a quick shout out to all founders – keep an eye on your compliances. Not just to stay on the right side of the law, but to use it as a business enabler and help your business be ready for growth.
Written By – Dhruv Nagarkatti
Dhruv Nagarkatti is the CEO at Quant LegalTech, a leading compliance automation software provider. To know more about how automation can affect your organization and what needs to be done, register for the Webinar on 23rd April 2021. Register now: https://lnkd.in/dCstwgu
Do you have any questions on Compliance software? Or do you want to implement one for your organization? Visit our website and drop your inquiry here: https://quantlegaltech.com/ or write to email@example.com