BRAZIL Law and Practice Contributed by: Fernanda Levy, Aline Bauermeister, Rodrigo Menezes and Fabiana Fagundes, FM/Derraik
vided standardised templates for streamlining financing rounds, such as: • Y Combinator’s SAFE; • National Venture Capital Association (NVCA) models widely used in the USA; • British Venture Capital Association (BVCA) models for VC and private equity transactions in the UK; and • Australian Investment Council (AIC) models. 3.5 Investor Safeguards In VC financing, investors often negotiate for specific terms to protect their investment in “downside scenarios” , such as the winding-up of the company. Such terms include the following. Liquidation Preference This is perhaps the most critical term for protect - ing VC investors in a downside scenario. Liqui - dation preference ensures that VC investors are paid out before common shareholders (includ - ing founders and employees) in the event of a liquidation, sale or dissolution of the company. Sometimes, this is structured as a multiple of the original investment (eg, 1x, 2x). Liquidation pref - erence provisions can also include participation rights, in which case investors have the ability to not only recover their initial investment but also to participate in the distribution of the remaining assets alongside common shareholders. Down-Round Anti-Dilution Provisions Anti-dilution provisions protect investors from equity dilution in the event that new shares are issued at a lower price than the price per share paid by the investor. There are typically two forms, as follows: • Full ratchet anti-dilution: This form of anti- dilution adjusts the conversion rate of pre -
ferred stock to the price at which new shares are issued, regardless of the amount of new capital raised. This is quite protective for investors but can be very punitive for existing shareholders. • Weighted average anti-dilution: More com - mon than “full ratchet” , this method uses a formula to adjust the conversion price based on the number of new shares issued and on the price at which they are sold at each financing round. It is generally seen as more equitable than the full ratchet method. Pre-Emption or Subscription Rights Pre-emption rights, also known as rights of first refusal, allow existing investors to maintain their percentage whenever new shares are issued. This is crucial for investors wishing to avoid dilu - tion in subsequent financing rounds. The terms specify how investors can participate in future rounds, typically requiring them to act within a certain timeframe when new shares are offered. In view of recent changes in market conditions, some investor safeguards, such as liquidation preference and anti-dilution terms, have been perceived as more start-up friendly. 3.6 Corporate Governance Protective Provisions and Governance VC investors often negotiate for specific rights that allow them to exercise significant influence over the management and corporate affairs of the companies they invest in. Effective governance rights for investors help ensure that the company is managed in a way that aligns with its long-term strategic goals and protects the interests of all shareholders, aiming at profitability or a successful exit. The challenge lies in establishing governance rules that are compatible with each stage of the start-
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