Venture Funding : An Overview

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• Venture Funding An Overview

Richard Grey 8 December 2008 17489774_1
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Matheson Ormsby Prentice Overview

• Dedicated Teams include
• Private Equity/Venture Capital
• Mergers Acquisitions
• Intellectual Property
• Employment, Pensions and Benefits
• Energy and Natural Resources
• Project Financing
• Construction
• Planning and Environmental
• Real Estate
• Competition and Regulatory

• A Leading Irish Law Firm
• Established in 1825, Matheson Ormsby
• Prentice is one of Irelands leading law
• firms.
• 550 Staff
• 78 Partners and Tax Principals
• 350 Legal and Tax Professionals
• Core Departments
• Corporate and Commercial
• Banking and Financial Services
• Commercial Litigation and Dispute Resolution
• Commercial Property
• Taxation

Matheson Ormsby Prentice has a first-class
reputation and a client base to matchEuropean
Legal 500 2006
Matheson Ormsby Prentice is seen by many
observers as head and shoulders above the
rest.Chambers Global 2007
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Corporate

• A Leading Team
• The firms Corporate and Commercial department
  advises on a broad range of Corporate
  transactions.
• Our Venture Capital/ Private Equity group is the
  only dedicated group of its kind among leading
  Irish law firms and is acknowledged as the leader
  in the Irish market.
• The leading position of the firm in the corporate
  sector in Ireland spans all aspects of the
  market, from private equity and venture
  capital-backed deals to all sizes of MA
  transactions through equity capital markets.
• Areas of practice include
• Venture Capital Private Equity
• Fundraisings
• Mergers and Acquisitions
• Joint Ventures and strategic alliances
• Flotations and other securities advice
• Commercial Agreements and Arrangements

• Relevant Experience
• The leading Irish adviser to both target
  companies and venture capital funds. Expertise
  developed initially in the context of technology
  investments including advising Trinity Venture
  Capital, the leading Irish technology venture
  capital fund, on each of its Irish investments.
• Expertise broadened in line with market
  developments and have advised on a large number
  of other transactions involving leading Irish and
  international venture and private equity funds
  including TVM Capital, Endeavour Vision Partners,
  ACT, Delta, Apax, Celtic House, Edgestone,
  Alchemy, Summit and Capvest.
• In recent years have been involved in various
  debt and equity fundraisings involving
  institutions such as Goodbody, Davy, Dolmen, IBI,
  Merrion and NCB on debt and equity fundraisings,
  both on the target and on the investor side.

Matheson Ormsby Prentice is "a serious player"
according to market opinion.IFLR 2007 edition
Matheson Ormsby Prentice has good experience
and a very good reputation on mergers and
acquisitions transactions European Legal 500
2006/2007
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INTRODUCTION

• There is currently EUR1.25 billion managed
  by venture capital funds on the island of
  Ireland
• Irish Venture Capital Association Annual Report
  2008
• From mid 2007, a total of EUR438 million has
  been raised and is available for investment
• Irish Venture Capital Association Annual Report
  2008
• Ireland was the top preferred environment for
  investing in private equity and venture capital
• European Venture Capital Association Study 2006

• Introduction to Venture Capital
• Process
• Legal Documentation
• Future Funding
• Venture Capital Today

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INTRODUCTION TO VENTURE CAPITAL

• Equity v Debt Finance
• Venture Capital Funds Investment Strategy and
  Life Cycle of Funds
• Debt Finance security fixed and floating
  charges
• Debt Finance and Restrictions on Future Funding
• Exit Strategy and Realisation 5-7 years
• Seed and Venture Capital
• Enterprise Ireland

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PROCESS

• Initial limited Due Diligence
• Term Sheet negotiated and sets out key terms of
  investment
• Detailed Due Diligence financial, legal and
  taxation
• Legal Documentation negotiation and execution
• Completion and Funding Subscription Tranches
• Further Funding Rounds Series B and C

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LEGAL DOCUMENTATION

• Length of time from completion of investment
  within which Investor can bring warranty
  claim(s). This is subject to negotiation but
  typically 12 24 months.

Warranty Limitations - Time
Warranty Limitations Financial

• Maximum cap on Warrantors liability
• De minimis threshold. Must be passed before
  claim can be made
• Individual claim threshold. Claims must pass this
  threshold before being counted towards de
  minimis threshold

Subscription Agreement (SA)
Investor Equity

• Warranties to cover key
• areas of Companys business to include
• Accounts
• Employees
• Litigation and Disputes
• Tax
• Corporate History
• Pensions
• Debts
• Intellectual Property

Warranties
Restrictive Covenants

• Type of securities to be subscribed for by
  investors.
• Rights of such securities may include
• Right of preferential return on liquidation /
  winding up.
• Anti-dilution right to maintain existing
  shareholding if further subscription / allotment.
• Redemption - rights of Investor to call upon
  Company to redeem shares for a specified premium
  upon occurrence of certain events.
• Conversion right to convert securities into
  Ordinary Shares.

Key Shareholders agree not to compete
with the Company or attempt to solicit clients
and employees of the Company for an agreed
period, typically 12-18 months.
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LEGAL DOCUMENTATION

• General disclosures which are of
• a general nature and typically disclose
• matters which are in the public
• domain.
• Specific disclosures which
• disclose specifically against the
• warranties contained in the
• Subscription Agreement

DISCLOSURES
Detailed disclosure process limits
potential warranty exposure
DISCLOSURE PROCESS
Discloses exceptions to vendor, tax and
general warranties contained in Subscription
Agreement
WARRANTY EXCEPTIONS

• No disclosure against certain key
• warranties to include-
• Issued share capital
• Shareholders title to shares
• Shareholders capacity to transfer shares

NO DISCLOSURE
DISCLOSURE LETTER

• Additional or updated disclosure permitted on
  completion of further subscription tranches

FURTHER SUBSCRIPTIONS
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LEGAL DOCUMENTATION

• Shareholders receiving offer for a
• proportion of their shares must ensure
• that potential purchasers make similar
• offer to other shareholders

Tag Along

• Sets out rights and restrictions attaching to
• different share classes

Share Rights

• Majority shareholders (percentage threshold to
  be determined) in favour of sale/exit have
  ability to drag dissenting
• shareholders

Drag Along
Liquidation Preference

• Right to maintain existing shareholdings if
  further subscription/allotment.
• Full ratchet protection
• Weighted average protection (narrow or broad)

Anti Dilution

• Upon the occurrence of a winding up/liquidation
  event, (which would typically include a share or
  asset sale), preference shareholders entitled to
  preferential return

ARTICLES OF ASSOCIATION
Dividends
Redemption

• Form of exit mechanism
• Preference shareholder would have right to
  require company to redeem preference shares at
  subscription price together with accrued
  dividends after a period of 5/7 years or upon
  occurrence of certain events

Transfers

• Investors and existing shareholders have right to
  transfer shares to associated companies or family
  members.
• All other circumstances shares typically subject
  to offer round process.

• Sets out dividend rights of each share class.
  Typically,
  investors would have preferential right to
  dividend equivalent to a specified percentage of
  subscription price. Dividend typically accrued
  and paid on liquidation event or redemption

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LEGAL DOCUMENTATION

• Sets out mechanism for dealing with disputes
  between shareholders and possible resolutions

Disputes

• Sets out details of Companys financial and
  trading information to be provided to Investors.
• Information rights typically subject to relevant
  Investor maintaining certain shareholding
  percentage.

Information Rights
SHAREHOLDER AGREEMENT

• Typically investors would seek exit/realisation
  after 3-5 years
• Exit mechanism would typically involve
  appointment of corporate finance adviser to
  consider available options
• Ability of investors to enforce/exit realisation
  to be negotiated

Exit

• Existing Shareholder rights to be safeguarded.
• Protections to include
• Drag along threshold to be set at relatively high
  levels
• Tag along provisions in the event of Investor(s)
  receiving an offer for their shares
• Offer round provisions in the event Investor(s)
  wish to dispose of their shares

Minority Protection

• Right of existing Shareholders to control board
  to be balanced with Investors desire for board
  representation
• Veto rights Typically would contain list of
  restricted transactions in respect of which no
  action may be taken without Investor consent

Control
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FUTURE FUNDING

• Future Funding Round Series B/C
• New/Existing Investors
• New Investors likely renegotiation of legal
  documentation
• Down Rounds anti dilute provision applies
• Existing VCs will not provide warranties

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VENTURE CAPITAL TODAY

• Number of Irish Funds
• European and US Funds Irish Market
• Similar investment criteria as Irish Funds
• Sector specific Funds e.g. renewable energy etc.
• New NCB Ventures Fund - 75m
• Recent venture backed sales and exits

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• Thank you
• Richard Grey
• D 353 1 232 2072
• T 353 1 232 2000
• Email richard.grey_at_mop.ie
• Web www.mop.ie