In a perfect world, investors and start-up founders would be aligned as to the completion date of an equity fundraising and the company in question would receive all the investment monies in cash on one single closing date.

However, there are a number of factors that can delay a particular investor’s timetable. For example, one investor may wish to conduct more detailed due diligence than other investors, or may have difficulties accessing or transferring their investment monies, or may simply be behind in the process for some other reason.

In such a case, a rolling close mechanism may be the solution.

Why use a rolling close?

A rolling close is a means of keeping the door open for further equity investment once the first part of a funding round has been closed.

That door can be left open for one or more specific investors, or for further equity investment generally (i.e. even when the source of the additional investment monies has not yet been identified).

How does a rolling close work?

The subscription agreement relating to the initial closing should contain a clause which provides for further closings to occur.

The terms of those further closings are generally limited in one or more of the following ways:

  1. A requirement that the further investment is made at the same or a higher price, to protect the initial investors from dilution of the value of their shareholding.
  2. A cap on the further investment amount to be raised, to limit the total size of the fundraising.
  3. A time limit to assure investors that this mechanism will not be used indefinitely and that the company will strive to achieve a higher valuation following the rolling close deadline.

It is generally also a condition of the rolling close that the new investors adhere to the terms of any shareholders’ agreement entered into between the initial investors, existing shareholders, founders and the company.

Shareholder authority is usually required to issue new shares and therefore will likely be required in connection with a rolling close.

It is advisable to obtain the requisite shareholder authority at the same time that authority is obtained for the first closing, in order to mitigate any potential delays or obstacles that shareholders might otherwise present to the rolling close.

What are the potential downsides?

With each closing comes additional administrative tasks for start-up founders, for example updating the company books, executing share certificates and making Companies House filings.

A rolling close will not always be a suitable solution to a protracted deal timetable. For example, if the investment round is being led by a particular investor, other investors may be reluctant to agree to close their investment ahead of that lead investor.

In such a scenario, where a company requires urgent funding but hasn’t yet obtained sign-off from the lead investor, an interim solution may be an advance subscription agreement or convertible loan note (see more on these and other potential solutions here).  

There is a possibility that new investors making an investment as part of the rolling close insist on specific rights being conferred on them, or obligations imposed on the company or its founders, which were not required by the initial investors.

If the original investment documents have already been executed, they are generally not easy to change as this will involve obtaining signatures from some or all of the investors, who may be reluctant to agree to a change to the terms on which they agreed to make their investment.

There are of course potential solutions to this issue, which will depend on the specific circumstances of the request, and which Fox Williams can advise on.

Should I use a rolling close mechanism?

Whether a rolling close is suitable for a particular funding round can only be determined on a case-by-case basis, but the above are just some of the considerations to take into account in considering a rolling close.

If you would like more information or need any assistance with your equity fundraising please contact Guy Morgan or Stephanie Tsang.

This is one in a series of articles relating to equity fundraisings produced by the Fox Williams Corporate team.

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