Key points
- In a fundraising round, the content of the shareholders’ agreement clauses matters as much as the split of the share capital.
- The danger often lies in the clauses of the agreement signed when the investors enter the share capital, which can become unfavourable.
- Founders can be forced to leave their start-up because of clauses signed during a seed round.
- You need to understand, analyse and anticipate how the clauses work in order to see the risks more clearly.
- Common clauses to watch include the approval clause, pre-emption, tag-along, drag-along, “call and put”, “buy or sell” (shotgun), “vesting” and the commitment clause.
- These clauses are neutral at the outset, but the shareholder base and the balance of power can change their effect.
The content of the clauses in the agreement matters just as much as the split of the share capital
For any start-up lawyer, fundraising is one of the fundamental stages.
During this transaction, the start-up’s founding shareholders (the “founders”) face financial, accounting and tax issues, but above all legal ones.
In practice, the founders take a position on what share of the start-up’s capital will go to the investors and in return for what amount of money. Yet practice shows that, in reality, the danger often lies in the clauses of the shareholders’ agreement signed when the investors enter the share capital.
At the heart of these agreements, there are frequently commitments and obligations that can prove extremely unfavourable, or even dangerous, for one party or the other.
It is not unusual for founders to be forced to leave their own start-up because of the skilful use of clauses they signed years earlier, during “seed rounds” (a start-up’s first fundraising).
So, in a fundraising round, beyond the investors’ acquisition of a stake, you should take care to understand, analyse, anticipate and walk through how the clauses work, so as to see and anticipate more clearly the risks that may arise from them.
The most common investor clauses to watch in a shareholders’ agreement
With this in mind, we set out below the features of the clauses most frequently found in agreements signed during fundraising rounds.
These clauses are:
- The approval clause;
- The pre-emption clause;
- The tag-along clause;
- The drag-along clause;
- The investors’ call and put option clauses (“call and put”);
- The “buy or sell” clause, known as the shotgun clause;
- The “vesting” clause;
- The commitment clause.
All these clauses are ultimately fairly neutral at the outset, but the composition of the shareholder base, the balance of power and the objectives pursued are all factors that can alter the neutrality of the clauses and therefore the balance of the agreement.
To clarify matters, we will examine the approval clause in a forthcoming article.
For assistance: shareholders’ agreement lawyer in Paris (in French).
