Let the funds roll: What are rolling closes and how can this fundraising structure help start-ups in their bid to raise capital?

In an ideal scenario, investors and founders alike are totally aligned throughout a funding round and all come together at the same time to invest their capital in a company on a single closing date. However, the reality is that the process can often be a lot more complicated. In the messy real world of start-ups closing the round in one go is often not possible where, for instance:

• investors may be at different stages of their own due diligence processes when funds are needed;
• others may have internal or external approvals that operate on different timelines or may be waiting to free up capital; or
• some investors may simply need more time to assess the opportunity before committing.

This is where adopting a flexible fundraising structure, like a rolling close, can be of particular benefit to founders in navigating the logistical problems that often arise during a funding round without delaying the company’s access to capital or jeopardising the momentum of the funding round.  

What is a rolling close?

A rolling close is a fundraising structure that allows investors to complete their investments at different times throughout a funding round over time rather than having to ensure that all the investors commit funds simultaneously on a single closing date which would ordinarily happen under a traditional ‘hard’ close.  

In practice, this approach can be far more efficient as it allows the company to begin accessing capital as soon as ready investors have signed their subscription agreements rather than waiting for the entire pool of investors to be ready with funds in hand to invest at the exact same point in time.

This can be especially useful in cash intensive businesses (which frankly includes most start-ups), and can be beneficial for both the company (who can deploy capital quickly) and investors (who do not have their funds tied up waiting for others to invest).  

Legal and commercial considerations  

There are specific legal and commercial considerations that come with implementing a rolling close effectively which founders should be aware of.  

For instance, founders will need to consider how they adapt the terms of the further closings for future investors to ensure that the rights of the earlier investors are protected. For instance:

• the terms of the further closings should contain specific requirements that further investments within the round are made at the same or a higher price to protect the initial investors from immediate dilution of their shareholding;
• investors would also likely want to see a longstop date for completion of the round and a maximum level of further share issuance; and
• particular care should be taken by founders to ensure fairness is maintained within the funding round so that later investors are not offered materially better terms than the early investors in the round.  

It is also advisable to obtain the requisite corporate approvals from existing shareholders in relation to the anticipated allotment and issue of shares in advance (even if this amount of shares may not be issued for several weeks under a rolling close) so as to mitigate against any possible delays. Founders will also have to review their constitutional documents such as the company’s articles of association and shareholders’ agreement (if applicable) to determine the required corporate approvals and whether specific investor consent is needed within the funding round.  

The appropriateness of a rolling close must be determined on a case-by-case basis. They may be less suitable where:

• a lead investor wants all investors to close together;
• there is uncertainty on valuation;
• later investors are likely to negotiate materially different terms;
• the company wants a clean cap table or a single completion process; or
• the round is tied to a specific commercial deadline.

However, if accelerated access to capital is the aim, you have a firm valuation, and you are a company that is in the early stages of its growth then a flexible fundraising structure which, if done right, allows constant access to capital over time may be more appealing. Overall rolling closes can be a useful tool for companies trying to seize opportunities as and when they arise rather than waiting for the perfect moment which so often in business never arrives.