UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
and receiving funding. Getting this wrong may jeopardise a transaction or put the founders and how their business is being managed under fur -
New share classes and rights will be created, inevitably diluting the equity and rights of exist - ing investors and founders alike. With every new financing round there will be different expecta - tions for the company’s growth strategy and ulti - mately exit prospects, often creating a tension between investors with different expectations on exit horizons. Usually, if the financing round involves multiple new investors, there will be a lead investor, who will take a more active role, and several minor investors, with the investor group usually shar - ing one counsel for efficiency. The company will have its own counsel, and existing investors may also choose to have separate counsel, to ensure their interests are represented and protected in the negotiation and document-drafting stages. The existing shareholders’ agreement will deter - mine investor consent matters and detail specif - ic share class rights. Generally, significant deci - sions such as major changes to the business model or new financing rounds with severe dilu - tion effects and changes to company control will require approval from all existing shareholders. 3.3 Investment Structure In the early stages of financing, ordinary shares are generally held by the founders and key employees. Ordinary shares have voting rights attached but, in a venture context, their holders are usually last in line to be paid out in a liquidity event, after creditors and preferred shareholders (preferred shareholders are usually the venture investors, sitting above the ordinary sharehold - ers in the “waterfall” ). In early-stage financings, the most common methods of raising funds are through convert - ible loan notes (CLNs), advanced subscription agreements (ASAs) and preferred equity. The
ther scrutiny. 3.2 Process
The typical timeline of a new financing round for a growth company can range from a few weeks to a few months, depending on several factors, such as the structure of the deal, the efficiency of negotiations, the level of due diligence required and legal and regulatory issues. The stages of the financing round generally include: • a preparation phase involving collaboration between the company and existing inves - tors to prepare the term sheet and pitch the proposal to new investors; • negotiating the term sheet and essential con - ditions of the investment; • conducting due diligence on the company’s founders, business model, financial state - ments, IP rights and legal and regulatory compliance; • the drafting of key legal documents – sub - scription agreement, shareholders’ agreement and articles of association – and other ancil - lary documents such as corporate authorities; and • the completion of the deal involving the exe - cution of the legal documents and the trans - fer of the investment funds to the company as consideration for the issuance and allotment of shares to the investor(s). The relationship between existing and new inves - tors will be a balancing act. A balance must be struck between protecting the interests of exist - ing investors who may want to maintain a certain level of control of the company while preserving their economics, and satisfying the interests of new investors demanding preferential treatment.
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