Our client is a startup in Hong Kong which is raising US$500,000.00 in a seed round prior to a Series A planned for next year.
The founders indicate initially that our advice is only needed for the shareholders agreement as they have already prepared the capitalization table and term-sheet based on documents available online or shared by other startups (!).
After reviewing the term sheet, we note that it does not indicate the provisions of the shareholders agreement to be entered into between the investors with the founders and require instructions from our client in order to be able to draft the shareholders agreement.
CHALLENGE
The challenge here is to avoid compromising the agreement reached between investors and founders while reviewing the legal documentation: the incomplete term sheet has already been circulated to the investors and signed by some of them. Furthermore, it appears that the capitalization table is not correct and will also need to be reviewed to provide a faire view of the fully diluted capital of the company.
ACTIONS
We explain the usual provisions found in shareholders agreements and which ones are relevant to the present situation.
Once the options are understood by the founders, they instruct us to prepare a new term sheet including details of the provisions to be included in the shareholders agreement, as well as a revised version of the capitalization table.
We draft in parallel the term sheet and shareholders agreement suitable for seed round with a selection of appropriate provisions. For instance, corporate governance:
- the management of the startup company remains with the founders (no director nominated by the investors);
- but the investors are given reinforced information rights in comparison with the default provisions of Hong Kong law, allowing them to receive regular updates on key performance indicators for the company’s business.
Regarding share transfers, the shareholders agreement contains customary provisions on lockup period, anti-dilution, rights of first refusal, tag along and drag along rights.
OUTCOME
The founders feel confident that the balance of rights given vs valuation of the company and investment amount is fair. The revised term-sheet including the schedule to proceed to the transfer of funds prior to the date agreed for capital increase is signed by the investors, as well as the shareholders agreement with a commencement date as soon as the new shares have been allotted.