The Rolling-Close Gathers Moss

Below is the ‘Tip of the Week’ transcript from the Podcast Ep37: The Algorithm for Raise Amount & Valuation (Leo Polovets)

In the past we’ve talked about the benefits of the rolling close. How a startup founder can incent angels to act by creating tranches of better terms, if they invest by a certain date. While, there are some benefits to this, today we talked about some significant drawbacks to the rolling-close

The cited problems include:

  • Creates a lot of complexity
  • Creates weird incentives
  • Upon exit investors that got in at different valuations have much different motivations to sell the company vs. continue on
  • Lots of paperwork and complexity for what eventually amounts to a pretty minor difference in equity dilution
  • It can increase the amount that needs to be raised later on. If the round was set and a fixed amount was raised then there is a clear expectation of the milestones and target valuation for the next round. Whereas if you’ve raised in a rolling fashion with escalating valuations, when the Series A is eventually reached, the required valuation at that point may be twice or 1.5x the normal expectation.
  • And finally if you remember back to the episode w/ Joanne Wilson, we talked about stacked notes. Often in these rolling close scnearios, the result is a series of stacked notes. And the impact to the investor here is that the agreed upon cap, in the note, is not what the note will convert at. Because of layered notes have a dilution effect on early cap amounts, the earliest investor will not convert at what you’d think, resulting in less equity.

So this fundraise approach does present benefits to getting the money in, but there are some downstream drawbacks for investors. And while a rolling stone may not gather moss, a rolling-close clearly does.

That’s all for this week. Give me a follow on Twitter or Angel List and if you didn’t win the ticket to pre-money, they’ve been nice enough to provide a discount code which, not surprisingly is FULLRATCHET. So go to to register & enter FULLRATCHET, that’s one word w/ no spaces, for a $100 discount.