Delivered at Casual Connect Asia 2016 You met the VCs, emailed your information decks and delivered your pitch. Then the term sheets arrive. You open them up and the alien language hits you! This session discusses the legal nature of preference shares, the common terms used in relation to preference shares and their impact on a funding round. Arm yourself with the knowledge you need to negotiate the preference share rights that investors commonly ask for.

1. 5 Things Every Founder
must know
about…Preference Shares
Chin Hooi-Yen
Advocate & Solicitor
Polaris Law Corporation

2. Setting the scene….
• You have met the VCs, emailed your information decks and delivered
your pitch. The term sheets arrive. You open them up and the alien
language hits you!
“preferential dividend on an as if converted basis”!
“1 X liquidation preference”!
“Conversion rights”!
“Average weighted anti-dilution formula”!
• Sit down, take some deep breaths. We will discuss some of the common
preference share rights that investors ask for. (I say ask, because these
rights are not mandated by law).

3. 1. What are preference shares?
• Shares, the rights of which can be defined by the company that
issues it.
• Not surprisingly…the holders of these shares usually enjoy
preferential rights over ordinary shareholders.
• A hybrid between ordinary shares and loans-gives holders the rights
of ordinary shareholders (such as voting rights & the ability to
convert into ordinary shares), and the ability to receive an
investment back with interest (if such rights are agreed).

4. 2. Preferential dividend rights
• Example: “The Shares will have priority for an annual dividend
equivalent to [5]% of the amount subscribed for the Shares (which
will compound until paid) [and will also participate pro-rata in any
further dividend paid on the ordinary shares on an as if converted
basis]”
• Allows the holder some return on investment.
• Pro-rata=proportionally based on percentage of shareholding in
the company.
• On an as if converted basis=“as if the preference shares were
converted into ordinary shares”

5. 2. Preferential dividend rights (2)
• Under Singapore law, dividends cannot be paid unless there
are profits available for that purpose.
• If the company wishes to pay dividends to ordinary
shareholders, it must ensure there is enough profit to pay the
interest due to preference shareholders and ordinary
shareholders.

6. 3. Liquidity preference
• Example:
• “In the event of any liquidation, dissolution or winding up of the
Company, the proceeds shall be paid as follows: First [one] times
the Subscription Price [plus declared and unpaid dividends] on each
Series A Preference Share. Thereafter, the Series A Preference
Shares participate with the Ordinary Shares on an as if converted
basis.
• A merger or consolidation or any transaction where the shareholders
before the transaction control less than [75%] of the voting power of
the outstanding shares of the surviving or acquiring corporation and
a sale, lease, transfer or other disposition of all or substantially all of
the assets of the Company will be treated as a liquidation event (a
“Deemed Liquidation Event”), thereby triggering payment of the
liquidation preferences described above.”

7. 3. Liquidity preference (2)
• If the company is liquidated and there is not enough money to go
round to all shareholders, the preference shareholder will be paid
first until they receive all of the amount invested (i.e.1 X).
• If there is enough to go round, then the preference shareholder
gets 2 bites of the cherry-they also get a pro rata share of the
balance.
• If 75% of the shares of the company or a substantial portion of its
assets are sold, the preference shareholder will also receive a
return of its investment first, then it will also be paid pro rata with
the ordinary shareholders.

8. 4. Conversion rights
• Example: “The Series A Preference Shares initially converts to
Ordinary Shares as a ratio of one for one at any time at the
option of the holder, subject to adjustments for dividends, splits,
combinations and similar events and as described below under
“Anti-dilution Provisions.””
• Allows the holder to enjoy the rights of ordinary shareholders if
desired. E.g. if the company is undertaking an IPO.
• On exercise of the conversion right, the preference shares will
be cancelled and ordinary shares issued to the investor.

9. 5. Anti-dilution
• The anti-dilution clause adjusts the conversion price of preference
shares to ordinary shares, if the company issues a new class of
shares at a price less than the price per share paid by an investor.
• The conversion price is the price per share that the investor pays.
• The new conversion price will be less than the original conversion
price.
• The purpose is to shift some of the dilutive effect to the ordinary
shareholders.
• Common formulas: Weighted average vs full ratchet.
• Weighted average is more common.

10. 5. Anti-dilution (2)
• The full ratchet formula reduces the conversion price to that of the
price of the new securities.
• The weighted average formula takes into account the amount of
money being raised by the company in the subsequent dilutive
financing and the price per share at which such new money is being
raised-resulting in a new conversion price that is in between the
original conversion price and the price per share paid by new
investors.
• Founders must ensure that certain shares issuances are excluded
from triggering the anti-dilution clause, e.g. share option schemes.

11. Thank you for your attention!
Any questions please?