Legal Hints: Your Guide to Investment and Exit Strategies
Q: What is SAFE and how can it benefit early-stage investors?
A: SAFE stands for Simple Agreement for Future Equity and is an instrument for early-stage investing developed by Y-Combinator. It is a simplified document with few terms to negotiate, making it suitable for passive investors and preferred by founders or VC lawyers. However, investors should be cautious as it is not a debt instrument and does not have a maturity date. Side Letters are often used to address important terms for investors, such as automatic conversion on an agreed date. If you’re interested in learning more about investing options, reach out to our VC Investment Team.
Q: How does venture debt work and why is it gaining popularity?
A: Venture debt is a loan provided to startups, particularly in uncertain market conditions where equity investments may slow down. Unlike equity financing, venture debt does not require a new valuation of the company as the lender does not receive equity initially. The loan is repaid according to a schedule, with agreed interest. The due diligence process is simplified, and transaction documents are fairly standard, making the process less costly. While financial covenants may not be required, lenders may expect collateral for repayment. To explore investing options in venture debt, contact our VD Investment Team.
Q: What factors should CEOs consider when evaluating exit offers?
A: When receiving an exit offer as a CEO, it’s important to consider the following:
(i) Review how the “exit event” is defined in corporate documents and ensure necessary corporate approvals are obtained.
(ii) Understand how the liquidation preference (liq-pref) works and the distribution to each stock class, including founders.
(iii) Familiarize yourself with drag-along provisions and determine their applicability under the proposed conditions. Decide if utilizing drag-along is worth it, considering potential investor satisfaction issues.
(iv) Maintain open and effective communication with shareholders, encouraging cooperation throughout the process. Investors can provide valuable support. Good luck with your exit!
Q: What role does the company play in secondary transactions, and why is it important?
A: In secondary transactions, where founders, eligible employees, or early investors sell their positions, the company’s involvement is crucial. The company should support the process by waiving pre-emption rights and ensuring existing shareholders do not exercise their rights. Transparent communication between the company and the buyer will enable a thorough evaluation of the transaction and gain necessary approvals. The company’s active participation cannot be overlooked. If you’re considering liquidity options, reach out to our Secondary Team for assistance.