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Investerarskydd vid venture capital-investeringar

Thiman, Johan (2008)
Department of Law
Abstract
This essay is devoted to quite a special form of investment - venture capital. More precisely the purpose is to map out, describe and analyse the most fundamental parts of investment protection in connection with venture capital investments. Venture capital is part of the market of risk capital, which refers to investments occuring on the receipt of, or possibility to receive ownership in a company. But venture capital also constitutes a special part of the smaller so called private equity market, which aims at risk capital investments in unlisted joint stock companies, the purpose of which being that ownership engagement will both active and time limited. The main characteristic of venture capital is in short that it is a question of... (More)
This essay is devoted to quite a special form of investment - venture capital. More precisely the purpose is to map out, describe and analyse the most fundamental parts of investment protection in connection with venture capital investments. Venture capital is part of the market of risk capital, which refers to investments occuring on the receipt of, or possibility to receive ownership in a company. But venture capital also constitutes a special part of the smaller so called private equity market, which aims at risk capital investments in unlisted joint stock companies, the purpose of which being that ownership engagement will both active and time limited. The main characteristic of venture capital is in short that it is a question of private equity investments in the earliest phases in the life cycle of a company. With respect to the important uncertainty and insecurity with which these investments are consequently connected, the investment protection must be sown up by a careful hand and out of consideration for the investor´s unique claims on return and risk taking. Without regular investment protection the investor is referred to by way of contract to create a set of rules to protect investment from unwanted events. There are three principle features in the investment protection which are generally found in the investment documentation: convertible preferred stock, dilution protection and the right to demand exit. Each feature provides the investment protection with a special dimension at the same time as interaction between them in an intricate way will secure that the investor can receive high returns at a reduced risk. Thus, they are the elements of investment protection. The preferred stock is a financially privileged stock and the liberty of the parties is great when it comes to deciding in what way the preferred stock will be favoured. Investor-friendly and generous directions of cumulative dividend and liquidation preference prevent the holders of the ordinary shares from acting disloyaly, who are more often than not in majority and not seldom being the founders or the management of the company. Another sign of venture capital investment is that the investment agreement also comprises preference to aquisitions proceedes. Conversion clauses together with redemption rights are used to ensure the investor an exit out of the company. The ownership of covertible preferred stock is certainly in most cases very advantageous but the preferred shareholders can be exposed to risk also in other situations. Primarily this prevails in those cases when in a later stage, the company needs to collect capital to further its business. In doing this the preferred shareholder runs the risk of receiving less influence and is forced to see the value of the investment diminish. For the protection of this there are formal and substantial anti-dilution mechanisms. The weighted average and full ratchet formulas provide for the investor´s interests in preserving the value of the investment by their resulting in that the investor´s entrance price will be adjusted down. A venture capital investment is definingly time limited between 3-7 years. As the portfolio company is often prevented from giving dividends the investor´s entire profit is made up of the capital proceeds which arises when the holdings are are sold off. With the support of the regulations in the investment agreement, which grant the investor rights to demand exit, the investor will be guaranteed that disposal can occur when this is at its most profitable. A right to force other shareholders to dispose of their share is called drag along. The opposite, the right, on the same terms as the majority to sell shares to a contemplated buyer is called tag along. The possibility to produce satisfactory investment protection is aggravated by the obliging rules of the Swedish Company Act. None the less the company law contains a structure which at the same time is devoted to ensuring that companies can bring about a suitable financing of their activity. All in all, this balance provides opportunities for creative business lawyers to construct efficient investment protection. Hopefully the conclusions and thoughts presented in the essay will shed a certain light on how investment protection in venture capital can be created. (Less)
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author
Thiman, Johan
supervisor
organization
year
type
H3 - Professional qualifications (4 Years - )
subject
keywords
Associationsrätt
language
Swedish
id
1562525
date added to LUP
2010-03-08 15:55:30
date last changed
2010-03-08 15:55:30
@misc{1562525,
  abstract     = {This essay is devoted to quite a special form of investment - venture capital. More precisely the purpose is to map out, describe and analyse the most fundamental parts of investment protection in connection with venture capital investments. Venture capital is part of the market of risk capital, which refers to investments occuring on the receipt of, or possibility to receive ownership in a company. But venture capital also constitutes a special part of the smaller so called private equity market, which aims at risk capital investments in unlisted joint stock companies, the purpose of which being that ownership engagement will both active and time limited. The main characteristic of venture capital is in short that it is a question of private equity investments in the earliest phases in the life cycle of a company. With respect to the important uncertainty and insecurity with which these investments are consequently connected, the investment protection must be sown up by a careful hand and out of consideration for the investor´s unique claims on return and risk taking. Without regular investment protection the investor is referred to by way of contract to create a set of rules to protect investment from unwanted events. There are three principle features in the investment protection which are generally found in the investment documentation: convertible preferred stock, dilution protection and the right to demand exit. Each feature provides the investment protection with a special dimension at the same time as interaction between them in an intricate way will secure that the investor can receive high returns at a reduced risk. Thus, they are the elements of investment protection. The preferred stock is a financially privileged stock and the liberty of the parties is great when it comes to deciding in what way the preferred stock will be favoured. Investor-friendly and generous directions of cumulative dividend and liquidation preference prevent the holders of the ordinary shares from acting disloyaly, who are more often than not in majority and not seldom being the founders or the management of the company. Another sign of venture capital investment is that the investment agreement also comprises preference to aquisitions proceedes. Conversion clauses together with redemption rights are used to ensure the investor an exit out of the company. The ownership of covertible preferred stock is certainly in most cases very advantageous but the preferred shareholders can be exposed to risk also in other situations. Primarily this prevails in those cases when in a later stage, the company needs to collect capital to further its business. In doing this the preferred shareholder runs the risk of receiving less influence and is forced to see the value of the investment diminish. For the protection of this there are formal and substantial anti-dilution mechanisms. The weighted average and full ratchet formulas provide for the investor´s interests in preserving the value of the investment by their resulting in that the investor´s entrance price will be adjusted down. A venture capital investment is definingly time limited between 3-7 years. As the portfolio company is often prevented from giving dividends the investor´s entire profit is made up of the capital proceeds which arises when the holdings are are sold off. With the support of the regulations in the investment agreement, which grant the investor rights to demand exit, the investor will be guaranteed that disposal can occur when this is at its most profitable. A right to force other shareholders to dispose of their share is called drag along. The opposite, the right, on the same terms as the majority to sell shares to a contemplated buyer is called tag along. The possibility to produce satisfactory investment protection is aggravated by the obliging rules of the Swedish Company Act. None the less the company law contains a structure which at the same time is devoted to ensuring that companies can bring about a suitable financing of their activity. All in all, this balance provides opportunities for creative business lawyers to construct efficient investment protection. Hopefully the conclusions and thoughts presented in the essay will shed a certain light on how investment protection in venture capital can be created.},
  author       = {Thiman, Johan},
  keyword      = {Associationsrätt},
  language     = {swe},
  note         = {Student Paper},
  title        = {Investerarskydd vid venture capital-investeringar},
  year         = {2008},
}