NETHERLANDS Law and Practice Contributed by: Marc Habermehl, Jeroen Smits, David de Groot and Max de Heer, Stibbe
Shareholders’ agreement This agreement contains the agreements between the various shareholders and the com - pany. These arrangements typically include: • certain information rights of the shareholders regarding the company; • drag- and tag-along rights; and • clauses regarding anti-dilution protection. Given that in the Netherlands shares are issued and transferred by having a notarial deed exe - cuted in front of a civil law notary, notarial docu - mentation is required (eg, deed of issue, deed of transfer, notary letter for funds flow at closing, power of attorney, etc). The Use of Legal Templates in the Netherlands Although certain organisations, such as Capital Waters, have taken the initiative of standardis - ing VC documentation, the use of industry-wide legal templates is not as widespread in the Neth - erlands compared to the USA or UK, where, respectively, the models of the National Venture Capital Association or the British Venture Capital
Down-round or anti-dilution protection VC funds typically invest in companies that have not yet (fully) matured, and the valuation for such companies may be less robust compared to matured companies that have a proven track record. For this reason and others, VC funds generally require protection for down rounds, which are investment rounds subsequent to the VC fund’s investment round, at a lower valuation than used in the previous round. If no protec - tion is provided for the VC, such down round will dilute the VC fund disproportionally. In Dutch VC transactions, down-round protec - tion is provided for by agreeing that the VC fund has the right to acquire additional shares against nominal value. This can be achieved, eg, by applying any of the following methods. Full ratchet The investor will be entitled to acquire such number of shares as they would have held had they made their investment against the lower valuation. This formula can be quite unsubtle, as it does not take into account the size of the down round. Weighted average Adjustments to the number of shares issued to existing investors will be made depending on the size of the down round. The following most- common types can be distinguished: • broad-based weighted average formula – this assumes that all shares are included in the average (including options, convertibles, war - rants, etc); and • narrow-based weighted average formula – this assumes that only the outstanding shares are included in the average.
Association are often used. 3.5 Investor Safeguards Downside Scenario Protection General
In a downside scenario, the main protection for VC funds will be through the preference shares they hold, which entitle them to liquida - tion proceeds before the ordinary shareholders receive any proceeds. In addition, VC funds tend to require protection against so-called down rounds, and from being dragged into an exit transaction against a valuation below the valua - tion at which they invested in the company.
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