DENMARK Law and Practice Contributed by: Poul Guo, Martin Søndergaard, Patricia Rasch and Jonas Miller Rasmussen, Moalem Weitemeyer
Preferred Shares Preferred shares are the most common alterna - tive to common stock in VC financings, typically offering liquidation preferences, ensuring that investors recover their investment – often at 1x their original contribution – before common shareholders receive any proceeds in an exit or liquidation. These shares frequently include anti-dilution protections, usually structured as a broad-based weighted average adjustment, though full ratchet provisions may be negotiated in investor-favourable deals. Voting rights attached to preferred shares are often equivalent to those of common stock, but investors typically negotiate veto rights over key corporate decisions, such as the issuance of new shares, amendments to governing documents, and significant M&A transactions. Additionally, preferred shareholders often secure board rep - resentation or, at a minimum, observer rights to maintain influence over strategic decisions. Convertible Notes Convertible notes are widely used in early-stage financings, particularly when valuation uncer - tainty makes equity pricing challenging. These instruments typically include: • a discount (10%–25%) to the next financing round; • a valuation cap to protect investors from excessive dilution if the start-up raises capital at a high valuation; and • an interest rate (typically 3%–8%), though interest is often accrued and converted into equity rather than paid in cash. The maturity date usually triggers automatic conversion at the next qualifying round, though some notes grant investors the option to request repayment if conversion does not occur with -
governance influence and secure exit pathways, while new investors – particularly anchor inves - tors – often push for preferred terms, board rep - resentation or enhanced protections. Balancing these interests requires careful structuring of the investment agreements. The choice of legal counsel depends on trans - action dynamics. In some cases, all investors engage joint counsel to streamline negotiations, particularly when their interests align. Howev - er, in more complex rounds – especially those involving significant governance changes or investor protections – existing and new investors may retain separate counsel to negotiate terms independently. The company typically appoints its own legal advisers to safeguard its interests. Decision-making mechanisms in a financing round depend on shareholder agreements and company by-laws. Majority requirements are often sufficient to approve new financings, par - ticularly when structured within an agreed frame - work. However, financings rarely proceed strictly in line with the mechanics contemplated in the shareholders’ agreement, requiring amendments to complete the round. Shareholders’ agree - ments often specify that amendments require a certain approval threshold, such as shareholders representing 90% of the equity. 3.3 Investment Structure In Denmark, early-stage financings often involve alternative equity instruments beyond common stock, particularly when investors seek down - side protection, preferential returns or greater influence over corporate governance. The most commonly used instruments include preferred shares and convertible notes, each offering dis - tinct rights and features that align with market standards.
148 CHAMBERS.COM
Powered by FlippingBook