BRAZIL Law and Practice Contributed by: Fernanda Levy, Aline Bauermeister, Rodrigo Menezes and Fabiana Fagundes, FM/Derraik
Majority requirements versus consent of all existing investors The most common form of investor consent is majority approval, especially for key decisions such as additional equity issuance or other mat - ters with dilution consequences. However, in some cases, protective provisions for a specific investor or group of investors are negotiated. 3.3 Investment Structure In early-stage financings in Brazil, convertible debt instruments are much more common than The most widely used debt instruments in the Brazilian VC industry are convertible loans and convertible debentures. The loan agreement or debenture deed will establish the obligation of the start-up to pay the debt on the maturity date, with the option (or obligation) for the investor to contribute its credit into the start-up’s share capital, subject to certain future events and as contractually established. Such instruments are widely used for three main reasons: • for the investor to avoid potential liability for the debts of the company – although share - holders are generally subject to limitation of liability and separation of assets of the com - pany, cases where the shareholders are held liable for the company’s debts are common; • as a creditor of the company, the investor will have a more senior-rank position than the shareholders for receiving liquidation assets of the company, in the event of bankruptcy; and equity issuances. Convertible Debt • early-stage start-ups are still poorly struc - tured in terms of financial and operating metrics as regards using traditional valuation
methods to enable calculation of equity inter - est. Please note that the investor’s ultimate goal is to have the debt instrument converted into equity, typically preferred stock, under certain condi - tions (such as a subsequent financing round – often a Series A round), provided the start-up is progressing satisfactorily and moving forward on its journey. It is very unlikely that a successful start-up will repay the loan to the investor, as if it were a traditional lender. The key features of a debt instrument include: • conversion discount – provides a discount on the price per share when the loan/note converts in the next financing round; • valuation cap – sets a maximum company valuation at which the loan/note will convert, protecting investors from too much dilution; • interest rate – accrues until conversion; • maturity date – specifies when the loan/note must be repaid or converted; and • main rights of the investor after the conver - sion, such as protection against dilution, liquidity rights and protective provisions. Simple Agreement for Future Equity (SAFE) The SAFE is a contract model designed and popularised by the US accelerator Y Combina - tor (YC) for early-stage investments. It is widely used in the USA and for start-ups’ investment deals structured offshore (usually through Cay - man Islands and Delaware entities). SAFEs do not have the nature of debt, which means that the investment must necessarily be converted into equity interest (upon the occur - rence of a liquidity event) or cancelled (in which case the investment is written off). A SAFE has a standard model, which reduces the need to
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