A PACT (“Pledge Agreement for Capital Transaction”) is a non-binding letter of intent signed by a qualified investor to indicate their desire to invest a specific amount of money into a startup or into a venture capital fund. The PACT is a Commitment Letter, which is commonly used in financial transactions.
The PACT Letter was developed in 2018 by the Founder Institute to solve the problem of internal fund offerings having excess investor interest. Before the creation of the PACT, it was difficult to identify which potential investors were serious about investing, commonly referred to as Hard Circled, and which other investors were casually exploring the investment, referred to as Soft Circled. Collecting signed PACT Letters provides a clear way to calculate the Hard Circled total, which reduces the uncertainty and guesswork of closing a multi-party investment round.
When a potential investor signs the PACT, they indicate their clear desire to invest, and they specify the amount of their desired investment. The PACT Letter asks the potential investor to self-identify as qualified and includes some limited confidentiality around the sharing of the deal terms. Lastly, the PACT also asks potential investors to provide correct information on the individual or entity making the investment, which is often needed to customize the closing agreements.
The process to secure PACT Letters from potential investors works as follows. All potential investors that express interest in an offering are provided a PACT to fill out and sign, ideally digitally. The PACT lists three options for the desired investment amount based on the size of the round, also offering a field to enter a custom amount. The legal language in the PACT is non-binding and in plain English, so filling out and signing a PACT Letter takes a couple of minutes.
A PACT template is below for anyone to use, and a couple of sample emails are also provided for assistance. The Founder Institute has successfully used the PACT in both the Funding Lab and VC Lab programs, helping startups raise capital in 3 to 6 months and helping new venture capital managers complete a first close in 4 to six months.
The PACT Letter Template
Sample Email to Limited Partners
Subject: Appreciate your feedback
Thank you for reviewing the materials on [our new fund]. We are now collecting feedback on our term sheet before preparing the definitive agreements for our first close.
If you would like to review the draft term sheet and receive the final closing documents, can you please sign and return the attached PACT Letter? I have also sent this to you for digital signature through [this digital signature service].
I look forward to receiving your feedback on the closing. Thank you.