Rolling Closes Versus Synchronous Closes

Earlier this week, in the wake of Y Combinator’s Demo Day, I saw a tweet go viral and generate lots of chatter. The tweet was written by YC’s President, Michael Seibel. I’ve never met Seibel (yet) though, of course, have heard amazing things about him from everyone I know and admired his style from afar. His tweet reads:

New weak investor move. I’ll commit now but won’t wire until the entire round is raised. If you have conviction: invest and help the founder finish their round with good intros to other investors. If you don’t have conviction: no problem, move on. No half-conviction.

Now, I have been around “tech Twitter” long enough not to wade into this topic in 280 characters. I have participated in many different types of seed rounds, but based on my experience of participating in over 100 seeds over the last 5+ years, I’d say the majority of those seed rounds (including around YC) were orchestrated by the founder to close on a specific date. Yes, sure, some of them are “rolling” closes where the investor who commits signs a document (usually a SAFE note) and then wires around that time. But, again, the majority of those rounds were coordinated to have documents circulated and wires set at a specific time.

In the case that Seibel cited in his tweet, we really don’t know what was going on in the example — did the investor simply mean that he or she wanted to know when the closing is so they could wire, or did the investor mean “round up all the commitments first, and then we can all wire at the same time”? It’s hard to know. While there is no shortage of bad behavior among investors (especially at a scene like YC, which has ballooned in size), I definitely know of a seed stage company that was based in the Valley, raised some seed capital with no real lead investors, and moved the team to Europe, worked out of a big castle, pivoted a few times, barely kept investor in the loop, and disbanded eventually.

Most of the rounds I participate in today are priced equity rounds. There is a process the founder goes through, he or she collects interest, and then works on closing the round with their lawyers at a fixed time. Most of these rounds have the investor wire on a specific day. The equity round process bakes this in, and helps every participant to know what they’re raising or holding at any given point, dissuading the company from taking on additional capital without some burden. I also participate in notes, like I just did with Downstream, and the founders still closed wires on the same day.

The point is — there are so many companies forming, and so many seed rounds, and so many different types of seed rounds, and so many little preferences around those processes, that is hard to know what is kosher and what is not. I am not here to judge what the investor cited in the tweet did or didn’t do well.

What I do feel deeply, however, is that we all in the early-stage startup ecosystem are likely being a bit too over-protective. For any startup selling an annual license, the deal may not get signed right away. Payment may be delayed. For any investor raising their own funds, you may have to chase down capital calls for each investment. People will say one thing, and then do another, or drag their feet. That is what happens to everyone. It is not fair. It could be better. Business life isn’t fair, though.

For me, how I work, I like synchronous events. I am happy to invest on a rolling basis if both sides are clear about what that means; and I also like to know that during a specific window, everyone in the round will sign the same documents and wire money to the same company. Perhaps this is all a function of synchronicity — in a rolling close, perhaps even with escalating caps on the notes or SAFES, the undulating nature of that process can be in conflict with a person’s desire for things to come together at a specific point in time. As they say in relationships, it’s often critically important “to be in sync.”