The document discusses key legal aspects of negotiating shareholders' and investment agreements for startups. It covers the cycle of a typical venture capital investment including a letter of intent, investment agreement, capital increase, and closing. It then discusses provisions within the investment agreement including vesting which transfers founder shares if they leave the company, liquidation preference which favors investors in an exit, tag/drag rights during a sale, and anti-dilution clauses to protect investors from share dilution. Maximizing advantages and minimizing risks during negotiation of these legal structures is important for both founders and investors.

1. EY Law
Workshop
Negotiation of Shareholders’/
Investment Agreements
www.start-up-initiative.ey.com

2. Page 2
Content
1. Cycle of a VC Investment
2. Vesting
3. Liquidation Preference
4. Tag Along / Drag Along
5. Anti-Dilution

3. Page 3
Cycle of a
VC Investment

4. Page 4
Cycle of a VC Investment -
Legal steps to preserve venture capital
Letter of Intent (LOI)
/ Term Sheet
Negotiation of Investment and
Shareholders‘ Agreement
(Gesellschafter-/
Beteiligungsvereinbarung)
Capital Increase
against issuance of
new shares
(Kapitalerhöhung)
► Revision/Amendment of Articles
of Association (Überarbeitung der
Satzung)
► Representations and Warranties
(Garantien und Haftung der
Gründer)
► Rights of First Refusal
(Vorerwerbsrechte)
► Employee Participation Program
(ESOP)
► Information Rights
► Rules of Procedure for the
Management (Geschäftsordnung
für die Geschäftsführer)
► Catalogue of Business Trans-
actions that require the Approval
of the Investor‘s Majority (Katalog
zustimmungspflichtiger Ge-
schäftsführungsmaßnahmen)
► Capital
Contribution
► Non Statutory
Payments into the
Capital Reserves
Exclusiveness
Signing Closing

5. Page 5
Vesting

6. Page 6
Vesting
Founders accept to transfer
their company shares, if they
are not operating for the start-
up anymore (usually as
managers)
Should be defined as detailed
as possible in the Investment
Agreement
Essential for investors‘ decision
to take stake in a start-up
business
Extent of such commitment and
valuation of shares may
depend on the reason for
leaving the company (“Good
Leaver“ / “Bad Leaver“)
Vesting Clause

7. Page 7
Vesting -
Advantages + Chances
Clearly define provision in order
to prevent exhaustive
arguments between founders
which can lead to blockades of
the business
Incentive for founders to
commit to the start-up business
long-term
The company may receive
shares to redistribute for
further incentive measures
Interest of investors to bind
founders as managers to the
start-up long-term

8. Page 8
May prolong the continuance of
a founder as shareholder
artificially
In case of conflict litigation
regarding the term “Bad
Leaver“ is likely
Founders commit to leave the
company against their will and
to transfer shares below market
value
“All or nothing”- rule could cost
founder all shares if he leaves
on its own discretion
Vesting -
Disadvantages + Risks

9. Page 9
Liquidation
Preference

10. Page 10
Liquidation Preference
• Founders should fully understand possible consequences
of liquidation preferences regarding the distribution of
proceeds and always bear this in mind during financing
rounds with the aid of computing models
• Also to be recognized is the interplay between the
amount of the enterprise valuation and the arrangement
of the liquidation preference
Provision in the
Investment
Agreement which
favours Investor in
the distribution of
exit proceeds
Distinction
between
• simple
• repeated
• interest-paying
Liquidation
Preference
Depending on the
agreed multiple
the favoured
Investor receives
his [Investment +
X] before any
disbursements to
other
shareholders
Negotiation of a
Liquidation
Preference is
frequently
neglected for the
benefit of other
talking points

11. Page 11
Tag Along -
Drag Along

12. Page 12
Tag Along - Drag Along
Tag along (Co-Sale Right) Drag along (Co-Sale Obligation)
► Investor is granted a co-sale right in
order to participate in early exit
opportunities
► If one or more shareholders intend to
sell their shares, the investor may
demand to sell his shares proportionally
or entirely to equal terms
► Investor demands drag along right, in
order to not miss exit opportunities due
to his position as minority shareholder
► Alternative: trigger by shareholders‘
resolution with agreed-upon majority
► Commitment of founding shareholders
to sell all their shares on equal terms on
demand
Standard clause -
difficult to negotiate
Timing and threshold value
should be negotiated

13. Page 13
Anti-Dilution

14. Page 14
Anti-Dilution
Anti-dilution clauses protect VC investors from
uncertainties of business valuation at the time of the
investment
Shall protect investor
from dilution of his
shares from a
proprietary perspective
Dilution is threatening
during a so calles
‚Down Round‘
Capital loss due to low
valuations is balanced
with additional shares
Variation:
Claim of the beneficiary to receive newly issued shares at
nominal value to preserve the percentage interest (due to
compensatory increase in share capital)

15. Page 15
Anti-Dilution
Advantages
To limit negative consequences of anti-dilution
clauses for founders, it is possible to agree on a
ruling which says that the clause only applies if
investors themselves take part in the new
financing round in a certain way, i.e. pay to play.
Modification for the benefit of
the Founders:
“Pay-to-Play“

16. Page 16 EY Start-Up Challenge
Dr. Max Lipsky
Senior Associate, Rechtsanwalt
Tel: +49 40 36132 17034
Mobil: +49 160 939 17034
E-Mail max.lipsky@de.ey.com
www.start-up-initiative.ey.com
Questions?
Please contact us anytime!

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