FRANCE Law and Practice Contributed by: David-James Sebag, Donald Davy and Marie-Sophie Chevreteau, Gide Loyrette Nouel
• Subscription forms executed by each sub - scriber. Contrary to other VC markets, France does not have standardised investments documents even if there is a strong market practice on the main terms of the investments. Some projects have been developed to provide guidelines to found - ers and investors by certain think tanks and law firms without being prevalent on the market. 3.5 Investor Safeguards “Downside scenario” protections include the fol - lowing. • A ratchet right entitling the investors, in the event of a down-round within a two- to five-year period from financing closing date, to benefit from additional shares reducing, therefore, price per share of their investment. This ratchet is usually structured through warrants attached to the shares (but can also be structured as an adjustment to the conver - sion ratio of preferred shares). Ratchet rights generally use a weighted average formula and can include “pay to play” condition. • Liquidation preference, entitling the inves - tors to be repaid for their investment before the other shareholders if a liquidation, sale or merger of the company takes place: (a) non-participating liquidation preference – investors receive the maximum between their pro rata of the total proceeds and their investment amount (1x non-par - ticipating, which is the most common protection); or (b) participating liquidation preference – investors receive their investment amount plus their pro rata of the remaining total proceed (if any).
Please note that ordinary shareholders can - not be completely stripped of all their financial rights. French market practice has imposed that all shareholders receive a minimal amount (even when proceeds are lower than the investment amount). This amount is generally equal to the nominal value of the shares or to a percentage of the proceeds (between 1% and 10%) and is to be allocated prior to the liquidation preference. Recent market conditions have led to a greater focus on liquidation preference rights, with a preference of two or three times to reward risks in downside scenarios (see 1.2 Key Trends ). • Anti-dilution rights in the event of a new share capital increase. Investors will benefit from an anti-dilution protection entitling them to maintain their percentage of shareholders and may also negotiate a priority right over future financings. 3.6 Corporate Governance Founders remain in charge of the management of the company, but investors usually negotiate the following rights: • the right to appoint one or more board mem - bers or observers; • the right to convey board meetings and shareholders meetings; • veto rights through a board-qualified major - ity of the board (ie, the majority including the investor board member) on certain opera - tional decisions including approval of annual budget, capex over a threshold, compensa - tion of the founders, related-party transac - tions, appointment/removal of key employ - ees, sale of assets, ESOP, etc; • veto rights through the investors’ majority (ie, approval of a percentage of the pre - ferred shares) on certain protective decisions
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