INTRODUCTION Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
mance). Cumulative dividends were present in 4.7% of all US VC deals with dividends in Q4 2021 and, notably, surged to 23.4% by Q1 2024. In the realm of anti-dilution provisions, only around 2% of transactions are provided with full anti-dilution ratchets to enhance investor protection during down rounds. Most transac - tions with anti-dilution protection (approximately 80%) used weighted average ratchets. In purchase or subscription agreements (other than stock purchase agreements in the US), a tangible tendency for founders to stand behind representations and warranties was discernible. This signals a shift by investors towards risk mitigation and a focus on documented due dili - gence, reflecting, overall, a more prudent invest - ment approach. Moreover, the allocation of board observer seats to investors’ representatives has increased. This trend mirrors investors’ aspirations for increased appetite for engagement in their portfolio com - panies’ governance and business aspects. Consent rights for the benefit of investors have decreased significantly. Compared to 2023, where in 42% of European convertible financ - ings investors managed to secure consent rights to certain matters, in 2024 only 15% of those convertible financings included consent rights for investors. This marked a shift back to more company-friendly terms, where convertible investors typically do not have consent rights on their convertible investment given their non- equity shareholder status at the time of invest- ment. Despite this, and for reasons similar to the shift in pre-emption rights, convertible investors continued to seek information rights in 49% of convertible financings, marking a 26% increase from 2023.
Liquidation preferences have long been nearly ubiquitous in many jurisdictions, especially in early stage financings. Participating liquidation preferences grant investors the right to receive their originally invested amount in the event of a sale or liquidation and, on top of that, share of any remaining proceeds with holders of com - mon stock on a pro rata basis (“double dip”). A non-participating 1x liquidation preference with a conversion right for the investor typically constitutes the default. Despite shifting econom - ics, there has not been widespread adoption of increasing preference multiples to more than 1x (outside of distress scenarios) while region - al practices seem to vary slightly. Any such increases, if agreed upon, are typically tailored to the specific circumstances of the situation. By contrast, investors have more frequently been able to negotiate participating liquidation prefer - ences across all stages of a company’s develop - ment cycle, compared with recent years. Continued trend towards standardised documentation Documentation for equity-based financing con - tinues to move towards standardisation across geographies, with key model documents origi - nating from the US National Venture Capital Association (NVCA), the British Private Equity and Venture Capital Association (BVCA), the German Start-up Association (Bundesverband Deutscher Startups e.V.) and the Simple Agree - ment for Future Equity (SAFE) (as described in more detail further on in this introductory article). Similar initiatives can be observed in many juris - dictions, including: • Canada (Canadian Venture Capital and Pri - vate Equity Association, or CVCA); • Singapore (Singapore Venture and Private Capital Association, or SVCA);
10
CHAMBERS.COM
Powered by FlippingBook