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Orrick's Guide To Orrick’s Guide to Venture Capital Deals in Germany 2018 Edition Orrick | 2018 1 Acknowledgements Many of our colleagues from our technology transaction teams in Germany, the United Kingdom and the United States have shared their experiences with us, challenged our thinking and helped develop the concepts laid out in this Guide. Among the many valuable contributors were Markus Piontek, Vanessa Sousa Höhl and Johannes Rüberg from our Düsseldorf office, and John Harrison from our Silicon Valley office. The authors would also like to thank our scientific research assistant Barbara Hasse and our great research teams both in our German and U.S. offices, most notablyLars Wöhning and Justine Koston, for their valuable contributions to this project. Copyright: Orrick, Herrington & Sutcliffe LLP, 2017. All rights reserved. The Orrick logo and “Orrick, Herrington & Sutcliffe LLP” are trademarks of Orrick, Herrington & Sutcliffe LLP. Version: January 2018 Disclaimer: This publication is for general informational purposes only. It is not intended as a substitute for the advice of competent legal, tax or other advisers in connection with any particular matter or issue and should not be used as a substitute. Opinions, interpretations and predictions expressed in this publication are the authors’ own and do not necessarily represent the views of Orrick, Herrington & Sutcliffe LLP. While the authors have made efforts to be accurate in their statements contained in this publication, neither they nor Orrick, Herrington & Sutcliffe LLP or anyone connected to them make any representation or warranty in this regard. Attorney Advertising. 2 Orrick | 2018 Table of Contents Introduction .................................................................................... 1 A. Getting Started ........................................................................... 3 I. Setting Up the Company ...........................................................................................................................5 1. Founder Holding Structures ................................................................................................................ 6 A Closer Look: Taxation Issues When a Founder Moves Abroad .................................................................7 2. The Cap Table .....................................................................................................................................9 A Closer Look: The Convertible Loan ....................................................................................................... 11 3. Future Financeability of the Company ................................................................................................14 4. Intellectual Property Rights ...............................................................................................................17 II. Investor Due Diligence ..........................................................................................................................19 A Closer Look: The Increased Importance of European Data Privacy Regulations for Technology Companies ... 22 III. The Legal Documents ...........................................................................................................................23 1. Term Sheet .......................................................................................................................................23 2. Investment Agreement and Shareholders’ Agreement ...................................................................... 24 3. Ancillary Documents .........................................................................................................................26 B. The Investment Agreement ...................................................... 29 I. Pre- & Post-Money Valuation .................................................................................................................31 II. Financial Contribution by the Investor ...................................................................................................33 1. Forms of Financial Contributions and Milestones ...............................................................................33 2. Capital Increase and Financing Round New Shares .............................................................................35 A Closer Look: Merger Clearance Requirements for Venture Capital Investments .....................................38 3. Other Useful Provisions .....................................................................................................................39 III. Representations, Warranties, and Remedies ........................................................................................41 1. Representations and Warranties in VC Financings vs. M&A Transactions .............................................41 2. Examples for Representations and Warranties .................................................................................. 43 3. Remedies ..........................................................................................................................................45 Orrick | 2018 3 C. The Shareholders’ Agreement .............................................. 49 I. Corporate Governance – Overview ................................................................................................... 51 1. The Advisory Board ..................................................................................................................... 52 2. Investor Majority and Investor Veto Rights ...................................................................................54 II. Information and Monitoring Rights .................................................................................................. 55 1. Information Rights ...................................................................................................................... 55 2. Inspection and Audit Rights ......................................................................................................... 57 3. Management Rights Letters for U.S. Investors – ERISA Compliance .............................................. 57 III. Financial Protection of the Investor ................................................................................................59 1. Antidilution ................................................................................................................................. 59 2. Preference Dividends .................................................................................................................. 63 3. Liquidation Preferences ...............................................................................................................64 4. Other Protective Covenants .......................................................................................................66 IV. Share Transfers and Exit .................................................................................................................69 1. General Rules and Founders’ Lock-Up ..........................................................................................69 2. Right of First Refusal vs. Right of First Offer .................................................................................70 3. Drag-Along and Tag-Along .......................................................................................................... 71 4. Exit and the Exit Process ............................................................................................................. 72 5. IPO-Related Provisions ................................................................................................................ 73 V. Founder Vesting and Leaver Events ................................................................................................. 77 1. Call-Options and the Vesting Schedule ........................................................................................78 2. Leaver Events and Compensation ................................................................................................ 79 VI. Dispute Settlement ........................................................................................................................81 1. Resolution of Specific Business Disputes by Expert Determination ............................................... 81 A Closer Look: Valuation Methods for Start-Ups ................................................................................ 83 2. General Dispute Settlement and Arbitration Clause ......................................................................84 VII. Other Relevant Provisions ............................................................................................................87 1. Matrimonial Regime and Prenuptial Agreements ..........................................................................87 2. Employee Stock Option Plan .......................................................................................................89 A Closer Look: Key Questions and Terms for a Virtual Stock Option Plan ........................................... 90 3. Noncompete and Nonsolicitation ................................................................................................ 93 4. The “Boilerplate Clauses” ...........................................................................................................94 D. Appendix: Sample Term Sheet ...............................................99 E. Our International Platform for Technology
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