A number of investors say they are interested in your fund or startup. But how can you tell which investors are really serious about committing capital? And how can you nudge them into writing those checks?
The answer is the PACT.
What is the PACT?
A PACT, (Pledge Agreement for Capital Transaction), is a signed, non-binding letter of intent for qualified investors who want to invest a specific amount of money into a startup or a venture capital fund. The PACT is a Commitment Letter, which is commonly used in multi-party or complex financial transactions.
The PACT Letter was developed in 2018 by the Founder Institute to efficiently screen the level of investor interest in a fund or startup. Before 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.
Why should you use the PACT?
Collecting signed PACTs provides a clear and time saving way to calculate the Hard Circled total, which reduces the uncertainty and guesswork of closing a multi-party investment round.
VC Lab successfully uses the PACT to help venture capital firms secure capital from Limited Partners. The Founder Institute also uses the PACT in the Funding Lab program for startups raising angel capital. To date, investors and funds have signed over 1,400 PACTs, and VC Lab systems are tracking as much as $50 MM per month in new PACTs being signed worldwide.
What does the PACT actually do?
When potential investors sign the PACT, they indicate a clear desire to invest, and they specify the amount of investment. The PACT also asks potential investors to self-identify as qualified and includes some limited confidentiality over deal terms.
Lastly, the PACT also asks potential investors to provide accurate information on the individual or entity making the investment, which is often needed to customize the closing agreements.
How do I use the PACT?
The process to secure PACT letters from potential investors works as follows:
- Download the PACT here (https://vcl.to/PACTv3)
- Edit the items in yellow, including the three target funding levels
- Upload the customized PACT to a document signing system
- Email an interested investor to sign the PACT with sample emails below
- Follow up with the interested investor until signed
- Mark the signed investor as hard circled in your CRM system
What are best practices for the PACT?
There are a variety of PACT best practices, including:
- Minimums – For a venture capital fund, VC Lab sees more success when funds have a high minimum and support different minimums for different types of Limited Partners. This means having different versions of a PACT.
- Signing – VC Lab recommends using a digital signing system for sending, tracking and signing a PACT. These systems allow investors to fill in key information needed for the final offering. The digital singing experience is commonly built into a deal closing workflow that involves follow up emails and updates.
- Closing Likelihood – A signed PACT indicates a 75% likelihood for the investor to actually complete the investment. This likelihood varies based on geography, type of offering, and other factors. Developing nations tend to have a 50% likelihood, as an example.
Download the PACT
The PACT is updated regularly by VC Lab. Version 3 is available for download below:
Sample PACT Emails
Use a PACT after a successful meeting
SUBJECT: Great to meet you…
Hello,
I enjoyed our meeting. As a next step, can you please let me know your desired investment amount so that we can reserve you a position in our upcoming close?
Attached is a non binding letter to participate in the fund that we need to move forward. I have also sent this to you for digital signature through [this digital signature service]. Please return it to me at your convenience.
Thank you.
Use a PACT before sending materials
SUBJECT: Here is access to our materials
Hello,
Thank you for expressing interest in our new fund. To receive our full investor presentation and other fund materials, can you please let us know your desired investment amount?
Attached is a non binding letter to participate in the fund that we need to customize the materials. I have also sent this to you for digital signature through [this digital signature service]. Please return it to me at your convenience.
Thank you.
Use a deadline to secure a PACT
SUBJECT: Update on our closing date
Hello,
Thank you for your interest in investing in our fund. We are planning to close in [time period] and are collecting commitments by [date].
Attached is a non binding letter to participate in the fund that we need to move forward. I have also sent this to you for digital signature through [this digital signature service]. Please return it to me at your convenience.
Thank you.