Valuation, reinforced majorities, drag-along and tag-along. What to negotiate before closing a funding round so you don't lose control of the company.
The document that really governs
In a funding round attention usually concentrates on valuation, but the document that shapes the company's day-to-day life for years afterwards is the shareholders' agreement.
That is where it is settled who has control, what gets decided and what happens when someone wants to exit, among many other matters.
Barcelona sees a growing volume of these transactions, and with them certain clauses have become standard. They are worth understanding before signing, never afterwards.
Reinforced majorities and reserved matters
An investor will typically ask that certain decisions require their approval: borrowing above a given amount, capital increases, disposal of significant assets, or hiring key executives.
The balance lies in the detail.
Too broad a list of reserved matters can paralyse ordinary management; too narrow a list leaves the investor without reasonable protection.
Review the financial thresholds against realistic figures for the business.
Drag-along, tag-along and exit
Drag-along clauses let a majority force the sale of 100% of the company, while tag-along rights let a minority join the sale on the same terms as the majority shareholder.
Both are reasonable, but the percentages and minimum prices make all the difference.
It is equally important to regulate what happens if a founder leaves the project. Vesting and good-leaver provisions prevent someone who departs early from retaining the same weight as those who stay.
Our recommendation
The shareholders' agreement should be negotiated alongside the term sheet, not as a later formality.
Once the financial terms are fixed, there is far less room to discuss governance.
If you are preparing a round or have received an investment proposal, we can review the documentation with you before you commit.
