Closing conditions are contractual requirements that must be fulfilled before an investment deal officially closes. They serve as checkpoints in the transaction process, allowing both investors and entrepreneurs to verify that nothing material has changed since the deal was negotiated and to ensure all necessary approvals and documentation are in place.
How It Works
Closing conditions are outlined in the term sheet and investment agreement. They typically include obligations like obtaining board approvals, completing satisfactory legal reviews, securing regulatory licenses, reaching minimum funding targets, and confirming financial statements. Some conditions are conditions precedent (must be met before closing), while others are conditions subsequent (must be met after closing). The investor and entrepreneur agree that if conditions aren't satisfied by a specified date, either party may terminate the deal.
Why It Matters for Investors
Closing conditions protect your capital by creating a structured pathway to investment. They give you legitimate exit rights if material issues surface during due diligence—such as undisclosed liabilities, regulatory problems, or key team departures. Rather than discovering problems after money is deployed, conditions ensure thorough verification. They also provide leverage to negotiate better terms if circumstances change. For entrepreneurs, closing conditions create clarity about what's expected before funds arrive, reducing ambiguity and dispute risk.
Example
You're investing $500,000 in a SaaS startup. Common closing conditions might include: (1) completion of a financial audit showing revenue within 10% of projections, (2) resolution of a pending intellectual property dispute, (3) obtaining a key enterprise customer contract, (4) no material adverse change in the company's financial condition, and (5) key founders signing employment agreements with three-year vesting schedules. The entrepreneur has 60 days to satisfy these conditions. If the IP dispute isn't resolved or revenue is significantly lower, you can walk away without losing your money.
Key Takeaways
- Closing conditions are contractual checkpoints that must be satisfied before deal completion and fund transfer
- They protect investors by creating legitimate exit rights if material issues emerge during due diligence
- Common conditions include financial audits, legal clearances, regulatory approvals, and key business metrics
- Both parties benefit from clear conditions that reduce post-investment disputes and align expectations