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Semelhante a Private Equity and Venture Capital Investment Agreements
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Private Equity and Venture Capital Investment Agreements
- 1. Private Equity and Venture Capital Investment Agreements Janice Y. Lederman Presented to Insight Information’s “Negotiating and Drafting Major Business Agreements” Winnipeg, Manitoba May 18, 2010
Notas do Editor
- No particular magic to terminology “ Not publicly traded” – more accurately. An investment where the co is not accessing the public capital markets (although it’s securities may be publicly traded); a private placement transaction In fact, the large US PE deals, such as the Cerberus Capital & United Rental deal that was in the press and in the Delaware courts last year regarding the $100m break fee, have all been private placements in public Co’s But in out tamer Canadian markets, PE generally is the bridge between Founder’s/Entrepreneur's equity and the public capital markets
- PE takes many forms, and PE funds tend to specialize
- Typically, an angel investor is a wealthy individual or group of individuals that use their own cash to invest in early stage companies and they often have an emotional stake in the company’s success. Angel investments typically would range between $25,000 and $1.5 million, which is below the radar for most venture capital funds.
- Risk is a driving force in determining deal structure For PE/VC investors there’s now a premium on risk management. Deals are structured to minimize downside risk and provide a greater payoff to the Investor at the expense of the Founder/Entrepreneur Stage of development is a key factor in risk assessment – the earlier the stage the greater the valuation challenge and the greater the risk Stages of development: Early (includes seed, start-up and advanced early) Late (includes expansion, acquisition/buyout) LBO/Buyout Turnaround Distressed Special Situation
- Some examples of this would be: to invest by way of convertible debenture rather than Prefferred Shares, and secure as much collateral as you can stage follow-on investments based on management performance or on achieving pre-determined milestones such as sales or earnings Negotiate steep discounts as a premium for being an early investor Bring in a co-investor with strategic value relative to high-risk areas
- Management – not skills, but can they work as a team Market – push or pull Operations – ability to meet sales projections Financial – how much time/$ required to get to next round? IPO? Business strategy – risk of change in market Use of proceeds provisions to cover off risk areas
- Convertible preferred equity with a fixed dividend probably the most common
- Convertible debt with or without security Common among VC investors Debt financing with equity kicker – unlikely for PE or VC, more angels Not unusual for there to be disagreement between Founder and Investor over the success/ future growth prospects of the Co - option/ warrants and milestone investments can be structured to get around these types of hurdles investment
- Non-financial tools include: right to board seat or observer status contractual right to company information (full, true and plain disclosure) anti-dilution rights pre-emptive / tag-along rights These things typically would be included in an Investor’s Rights Agreement
- Most of these elements are pretty straightforward, except possibly the anti-dilution component - there’s a valuation and pricing component to dilution protection which comes into play in the term sheet; you want to buy shares on the fully diluted number of shares, taking into account all commitments to issue shares (options, warrants, convertible debt, etc) you need to be explicit about whether you’re dealing with a pre-money or post money valuation: pre-money is the value of the Co before adding the capital you’re going to get from the financing; to arrive at the post-money valuation you simply add the additional capital to the fully-diluted pre-money valuation As the lawyer, you don’t have to be knowledgeable about how you do these calculations, but you do need to know what questions to ask and what needs to be explicit in terms of language in the term sheet Then there’s anti-dilution protection: to prevent a CO from dilutive transactions, whether that's stripping out value by way of stock dividends or placing a later round of financing at a lower price than the earlier rounds two approaches to anti-dilution provisions: full ratchet and weighted average
- Break fees have been controversial recently; long history Started with the no-shop clause – Seller couldn’t shop the deal for a period of time; Delaware Courts looked at that and said managers have a fiduciary obligation to seek the best price, so where a superior proposal came along (unsolicited so Seller didn’t actively breach the no-shop clause) the court said management had to look at the superior offer; became known as the fiduciary out; so Investors negotiated a break fee at the same time, Investors started putting conditional on financing clauses in terms sheets; so Sellers negotiated reverse break fees In Cerberus – the parties negotiated a $100m break fee and the agreement said it was to preclude other remedies, although another section of the agreement said that equitable remedies including specific performance were available. The Court held that as the agreement wasn’t clear, you had to look to the “ forthright negotiator principle ” - that is, the the subjective understanding of one party that was objectively manifested and known or ought to have been known by the other. In this case, as Cerberus consistently talked about the break fee as being the sole remedy, that was implicitly agreed to by United Rentals in the negotiations
- I suggest that you don’t simply rely on the due diligence out if there are other conditions, such as board approval or debt financing Make each out explicit, if that’s what’s intended Even though most provisions non-binding, you have to be mindful about exposure to an implied covenant of good faith and fair dealing, especially if Seller negotiated a good faith clause in exchange for the no-shop right US generally has a doctrine of good faith in the performance of contracts and a fair number of cases have supported the concept of an implied a duty of good faith in negotiating contracts Canadian law has no express recognition of a generalized duty of good faith, but some cases have moved in that direction (Martel, SCC, 2000 obiter)