UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
Subscription Agreement This is a binding contract between the inves - tors and the company, detailing the number and class of shares subscribed for, payment terms and warranties from the company to the inves - tors. Shareholders’ Agreement This is a binding contract between the share - holders, the founders and the company, which regulates the relationship between them all. The document is private and, therefore, houses mat - ters that require confidentiality. Key provisions will include, inter alia, investor protections such as consent matters, information rights and board representation, as well as founder undertakings and covenants. The investors who are subscrib - ing to shares in the company will be signatories to the shareholders’ agreement, as well as cur - rent investors. Not all shareholders have to be privy to this agreement, but it is generally rec - ommended. Articles of Association The company’s constitution sets out the rights attaching to the shares, including liquidation preference, procedures for the issue and trans - fer of shares such as pre-emption (and any such restrictions), exit provisions, and the governance of board and shareholder meetings. Templates The BVCA publishes standardised templates for the subscription agreement, shareholders’ agreement and articles of association for post- seed financing rounds. The purpose of these documents is to promote industry-standard legal documents, allowing investors and found - ers to focus on commercial, deal-specific mat - ters, thereby reducing the frictional cost of capital to investors and companies alike. The latest update to these documents was in Febru -
ary 2025, with the changes in this latest update being less substantive compared to the earlier 2023 revisions to the documents. Ancillary documents to the key legal documents include: • the management rights letter from the com - pany to the investor outlining matters of com - pany management and control in which the investor may participate – these are generally seen with regulated venture capital funds to ensure they can meet reporting requirements, amongst other rights; • a disclosure letter from the company to inves - tors setting out the disclosures against, or exceptions to, warranties given in the sub - scription agreement; • the founder service agreement setting out a founder’s obligations, directors’ duties and the equity vesting schedule; and • confirmatory IP assignment agreements, sweeping up any concerns relating to histori - cal IP. 3.5 Investor Safeguards Investors can secure the following key terms in a downside or winding-up scenario with respect to other investors, founders and employees. Liquidation Preference This dictates the order and amount investors and other shareholders are returned if a liquidity event occurs. The mechanics of the liquidation preference structure are similar to other venture- friendly jurisdictions, layering share classes to create a preference stack, assigning a liquidation preference multiple for each class of shares, and participation rights (ie, non-participating prefer - ence v participating preference). If the company is wound down or sold for a lower valuation than the original investment, investors holding
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