Getting Equity What Happens Thomas G' Michelet, partner

1
Getting Equity - What Happens?Thomas G.
Michelet, partner
7
26.10.2004
2
Investment process - how it may happen
Investor Final Approval
Investor Initial Approval
Investor Go Ahead


Negotiations on documen-tation
Initial discussions
Innledende diskusjoner
Initial contact
Term Sheet
Due Diligence
Closing

• General review of
• The company
• Business plan
• Financial statements
• / budget
• Discussions with
• management

Main terms and conditions of the investment

• Normally
• Legal
• Technical
• Less frequent
• Environment
• Market

• Transactions
• Agreement
• Shareholders
• Agreement
• Loan Agreement
• Employment
• agreements

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Term Sheet - The First Step (12)
Issues Key Elements Comments
Investor Company Often also all or the majority
shareholders
Parties Equity financing Debt
financing Pricing Other matters

• Capital increase
• (one or several tranches)
• Purchase of shares

Purchase of shares normally not desired by the
investor

• Pari passu (equal ranking with other debt)
• Convertible debt
• Security

• Convertible debt most common
• Who has the right to convert?
• What are the conditions?

• Pre-money value for the first tranche
• Calculation method for subsequent
• tranche(s)

• Typical haggling matter
• Make sure that the provisions are clear

Minority protection rights (Preference shares? /
Other preferential rights)
See slide on Shareholders Agreement
4
Term Sheet - The First Step (22)

• An important document that will affect the
  subsequent negotiations
• Therefore, spend time in order to
• Thoruoghly examine the terms and conditions
• Discuss them internally
• Contact your legal advisor (should have been
  contacted already!)
• Negotiate with the investor(s)

5
Transaction Agreement - Key Elements
Issues Key Elements Comments
Investor Company Often also all or the majority
shareholders
Parties Equity/Debt Representations
Warranties (r/w) (garantier) Indemnification
Equity ( loan) contribution - amount Pre-money
valuation Valuation in rel. to subsequent
tranche(s)

• Technical issues, but avoid ambiguity
• on valuation matters (should be
• possible to objectively verify)
• How secure incentives for key
• employees? (options, other schemes
• (envy ratio)?)

• Provide security for the investor as to the
• company as investment object
• Includes ownership of shares, title to
• assets (incl. IPR), true and correct
• financial statements (FS), no liabilities
• other than described in the FS,
• no litigation, etc.

Can you really confirm the contents of the reps
warranties?
Shareholders ( company?) to indemnify investor
for loss based on breach of r/w (normally
excluding consequential losses)

• Who is liable for breach of r/w?
• What is the limit of exposure (
• or amount)?
• When does the liability expire?

6
Shareholders Agreement - Key Elements (12)
Issues Key Elements Comments
Investor All or the majority shareholders Company
Parties Common/Pref. Shares? Investor
Additional Rights

• Pref. shares - a separate class of shares
• or
• Common shares, with aditional rights
• stipulated in the shareholders
• agreement

• Pref. Shares
• Will often have to be converted later
• Simplifies notification of pref. rights

• Investor will want to limit his/her risks
• Possible down-side can be limited in
• various ways (see next slide)

• Does the investor get too much
• control?
• Does the investor take too much of
• the up-side?

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Shareholders Agreement - Key Elements (22)
Investor additional rights may include

• Liquidation Preference
• Pre-emption Right
• Right of First Refusal
• Right to nominate
• Directors/Chairman
• Anti-dilution rights
• Tag Along
• Drag Along
• Lock-Up
• Call Option
• Put Option
• Redemption Right
• Listing Right

• Preferential right in liquidation/bankruptcy,
  sometimes also in
• sale/mergers
• Preferantial right in capital increases
• Sale of shares
• In future capital increases right to lower
  subscription price e.g. nominal
• value/bonus issues in order to maintain (and
  sometimes increase)
• shareholding
• Participate in other shareholders sale of
  shares, normally on a pro rata
• basis
• Force other shareholders to sell their shares
• Prohibition against sale of shares
• Right to buy other shareholders shares
• Right to sell shares to others
• Right to demand redemption (NB 10 -limitation
  under Norwegian
• law))
• Right to demand listing of the company

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Loan Agreement / Employment Agreements

• Loan Agreement
• Parties investor and the company
• Pari passu/Secured
• Convertible loans (who can request conversion?)
• Mezzanine (normally temporary financing for
  specific purpose)
• not frequently used in Norway to date
• high RoR (i.e. high interest rate)
• can be convertible (or sometimes separate
  warrants are required)
• Employment agreements
• Normally only for key employees
• Salary, fringe benefits etc
• Options
• Notice period
• Non-compete
• Non-solicitation

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Conclusions

• Carefully evaluate
• What type of financing are you looking for?
• What type of investor do you prefer?
• Can you confirm the reps/warranties?
• What is your exposure in the event of breach of
  reps/warranties?
• Do the terms and conditions stipulated by the
  investor limit or expand the future development
  of the company and the shareholder values?
• Is the risk sharing reasonably distributed?
• Dont get too exited although cash
  in almost there
• At the same time A partner can be
  adding values to your business prospects

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