Drafting Shareholder Agreements for Venture Capital Investment

Description

When VC enters into the picture, the corporate dynamic is profoundly affected. VCs want to know that company ownership cannot change without their consent. Restrictions can take the form of outright prohibitions on transfer or right of first offer/right of first refusal provisions. Founders and common shareholders may disagree on the level of these restrictions.

VCs will require some level of control over the company, which comes in the form of the right to appoint board members and the right to veto certain specified actions. The balance to be struck in the shareholder agreement is for the VC to have enough control to protect its investment while not stifling the company’s agility in an ever-changing business environment.

Drag-along rights allow a VC to force other shareholders to sell their stock when the VC finds a buyer. The threshold price is critical—if it is too low, little or nothing may be left over for the common shareholders after payment on the VC’s shares. Further complicating matters may be the desire of the founder(s) to transfer their shares into trusts and estate-planning vehicles. These provisions will need to be crafted to address the concerns of the VC.

Listen as our authoritative panel discusses the key provisions which must be included in shareholder agreements when adding a VC investor into the ownership structure.