Companies, especially startups, often seek external financing to expand their activity. When the funding does not come from traditional financial institutions, it typically takes the form of financing rounds. In these rounds, investment funds inject cash into the company in exchange for a stake in its capital, effectively becoming partners.
Given the shared interest of investors, startups, and founding partners in the success of the investment, the parties enter into an investment agreement and/or a shareholders’ agreement to regulate the intrinsic aspects of the investment.
Investment Agreement
Typically, an investment agreement is agreed on when the investor plans to disburse the financing in successive moments, referred to as ‘tranches.’ The contract links these tranches to specific milestones, outlining the relevant terms and conditions. Reaching these commercial milestones is crucial for the startup to secure the next round of funding.
Shareholders’ Agreement
The shareholders’ agreement governs the relationships among shareholders and their relations with the company. This agreement needs to be customized to suit the specific interests of the shareholders of each company and drafted for each unique case. We now outline the essential clauses typically included in shareholders’ agreements.
Appointment of Positions
This clause determines the rights of certain shareholders to designate positions within the management body. The typical formula grants founding partners the authority to appoint the chairman of the board of directors and, where applicable, the executive director, while the investor usually appoints the board’s secretary.
Reinforced Majorities
These clauses aim to broaden the majority regime established by law for adopting resolutions on specific matters, either at the general shareholders’ meeting or within the managing body. Such clauses may grant a veto right to one of the shareholders, so their terms warrant careful negotiation.
Exclusivity, Permanence, and Non-Compete
These three clauses seek to secure the founding partners’ commitment to remaining in the company and preserve the business. Typically imposed by investors as a condition for financing, these clauses recognize that founding partners own the company’s know-how. The objective is to ensure that this expertise remains with the startup after the investment.
Drag-Along and Tag-Along Rights
The drag-along right is a prerogative of the majority shareholder to drag-along minority shareholders in the event of receiving a third-party offer for all of the company. Inversely, the tag-along right entitles the minority shareholder to tag-along with the majority shareholder if they should decide to transfer its shares to a third party.
Stock option or phantom share plans
Establishing incentive plans, such as stock options or phantom shares pools, aims to encourage employees’ involvement and strengthen their commitment to the company. By providing these variable remuneration systems, these people benefit directly from the company’s increased value to which they have contributed, favouring them to remain dedicated to the company.
Pre-emptive Rights
Investors often include these clauses to secure their investment, such as preferential collection rights, especially in company liquidation or dividend distribution scenarios.
Furthermore, shareholders’ agreements often feature clauses aimed at preventing the dilution of the investor at ensuring broader information rights than established by law or at establishing specific obligations on one of the shareholders.
It is important to point out that each shareholder agreement is unique and requires the inclusion of all necessary clauses to ensure the good functioning of the company and, therefore, the success of the investment.
For further information regarding the clauses in investment rounds in Spain,
