Investment - VC 2024 PDF

Investment – Venture Capital Master in Legal Advice to Companies October, 24 2024  Venture Capital. Concept Venture Capital vs. Private Equity Startups’ Stages and Financing Venture Capital. Investors and Valuation Venture Capital. Investment Structure Equity Investment...

Investment – Venture Capital Master in Legal Advice to Companies October, 24 2024  Venture Capital. Concept Venture Capital vs. Private Equity Startups’ Stages and Financing Venture Capital. Investors and Valuation Venture Capital. Investment Structure Equity Investment 16.54 cm x 28.33 cm (6.51 in x 11.15 in) Debt Investment squirepattonboggs.com 2  Venture Capital. Concept – Investment in companies with high growth potential and high levels of risk in return for a percentage of the company – One of the main sources of startups financing – Startup's origin: Silicon Valley (60’s) Spain (90’s) Startup Stage Growth Stage Maturity Stage squirepattonboggs.com 3 Venture Capital vs. Private Equity Risk - Control - Return  Private equity: Capital invested in a company or other entity that is not publicly listed or traded Private equity firms mostly buy mature companies that are already established. Companies may be deteriorating. Private equity houses buy these companies and optimize operations to increase revenues Private equity firms mostly buy 100% ownership of the companies in which they invest: total control of the firm after the buyout  Venture capital: Funding given to startups or other young businesses that show high growth potential in long-term Venture capital firms invest less than 50% of the equity of the companies. Most venture capital firms prefer to spread out their risk and invest in many different companies squirepattonboggs.com 4 Startups’ Stages and Financing Startup Stage Growth Stage Maturity and Exit Stage  Founders’ personal financing  Venture Capital  Major financial funding  Minor financial funding  Bonds  Crowdfunding y Accelerators  IPO  Pre-Seed & Seed Investment  Private Exit: M&A /  FFF Bankruptcy  Business Angels No institutional investors or Institutional investors  Financial investors very low amount Significant rounds (Preferred  Additional Rounds (Preferred Small rounds (Common Stock) Stock) Shares) Pre-seed  below $150k Series A, B & C  Series D & E Seed and Angels  $10k - $2M VC Early Stage  $1M - $10M  > $100M VC Later Stage  $10M - $50M A “Unicorn” is a privately held startup valued at over $1 billion before trading in a secondary market squirepattonboggs.com 5 Venture Capital. Investors’ valuation  Main categories of Investors  Financial Investors: Exit Maximum return (multiple) of the investment on exit  Strategic Investors: Synergies Collaboration agreements, service agreements, license agreements, access to technology, etc.  Valuation  Two significant questions: How sexy is your idea (startup)? How can we valuate the future?  VC Valuation Method: calculation of the return on investment in N years (on exit) - IRR Pre-Money and Post-Money Valuation “On a fully-diluted and as converted basis” (convertible instruments, warrants, phantom shares, stock options, etc) squirepattonboggs.com 6 Venture Capital. Investment Structure  Equity Investment Agreement and Shareholders' Agreement Certainty about the valuation and percentage of capital acquired Higher difficulty of negotiations  Debt Convertible Loan / Note (Profit Participating Loans) Increased risk for the investor (lack of valuation subject to the next round) Reduced difficulty in negotiations SAFE (2013 Y Combinator) Simple Agreement for Future Equity KISS (2014 500 Startups) Keep It Simple Security ASA (SeedSummit) Advance Subscription Agreement squirepattonboggs.com 7 Equity Investment (I) Investment Agreement  Investment through share capital increase Contributions (money or in kind) Tranches (KPIs) The Investment Agreement is signed by all existing shareholders and the new investors Previous SHA: Waiver of pre-emptive rights  Representations & Warranties: who grants them?  Types of Shares/Stock according to the Investment Round Common Stock Preferred Stock: Governance, Dividends and Exit (Liquidation - Waterfall) Founders’ protection squirepattonboggs.com 8 Equity Investment (II) Shareholders’ Agreement  Transfer of Shares  ESOPs & Phantom Plans Lock-up Period (Founders) Attracting & retaining talent Permitted transfers Accounts for company Pre-emptive Right of Purchase "ROFR" valuation purposes: "on a fully-diluted and as Tag Along: proportional vs. full converted basis" Drag Along: change of control Right to receive the  Governance economic proceeds upon a Liquidation Event (no legal Reserved Matters. Deadlocks ownership over shares) Appointment of Directors. Observers. D&O  Non-Compete Information rights VC Investors are reluctant  Reverse Vesting Mechanisms Risk for Founders in case (Founders) relevant involvement of the investors in management Good Leaver / Bad Leaver squirepattonboggs.com 9 Equity Investment (III) Shareholders’ Agreement (cont.)  Anti-dilution Mechanisms Down-round Financing Protection of (i) the value of the investment; and (ii) the percentage of stock ownership Concurrent interests: Founder - Previous Investor - New Investor Types of protection of the new investor: (i) "Weighted Average Price": Broad-based / Narrow-based, (ii) "Full Ratchet“; and (iii) Pre-emptive right of acquisition + "Pay to Play"  Liquidation Preference - Waterfall "Liquidation Events": (i) Dissolution and liquidation, (ii) Sale or structural modification involving a change of control and (iii) IPO. Bankruptcy? Types of Liquidation Preference: - Participating: Pro-investor. Investment multiple (e.g. 1.5X) + pro rata - Non-participating: Pro-company. Investment multiple (e.g. 1.5X)  Additional investment and potential rounds preference squirepattonboggs.com 10 Debt Investment (I) Convertible Loan / Note  Debt convertible into company share capital when a certain event takes place (usually a new Financing Round)  Current or New Investors: Return? Interest?  Why are Convertible Loans used? Discrepancy in the Pre-Money valuation Small rounds or prior to a new Financing Round Need to strengthen the Net Equity Faster, easier, less cost  How are they implemented? Profit Participating Loans Convertible debt (subordinated or not) Risk in case of Bankruptcy (= equity 10%) squirepattonboggs.com 11 Debt Investment (II)  Main characteristics:  Conversion through capital increase by credit compensation (compulsory vote in favour)  Valuation: Pre-Money Valuation of the Financing Round with a discount (20%) to reward the higher risk assumed by investors who advance the investment Pre-Money Valuation agreed with a maximum conversion CAP. Uncertain valuation: certain percentage of Post-Money participation  Term: normally 12 months (conversion or repayment)  Types of Shares:  The same class of shares as in the next Financing Round  What if there has been no new Financing Round?  Other relevant questions:  Change of Control  Protective Covenants (Indebtedness, Investments and disposal of assets) squirepattonboggs.com 12  FOR: Thanks for your attention