VS&H are members of the British Venture Capital Association and act for a broad range of venture capitalists, business angels and start-up companies. Since 1998 we have completed more than 50 different investments in start-up companies ranging from £100,000 to more than £5,000,000. We have specialised in technology driven companies in many different fields, although predominantly in the electronics and life sciences fields. Whilst such investments raise many issues that have been dealt with in the general corporate acquisition section of our site, they also raise some very specific concerns that are, if not unique to, heavily emphasised in, venture capital driven transactions:

• SHARE STRUCTURE – for investments in companies, venture capitalists look to set up more sophisticated multiple classes of shares, using relatively complex articles of association. These are used to achieve:

• Preferential rights to income – venture capitalists look to earn a very high rate of return on their investments, to compensate for the relatively high failure rate of start-up businesses. One way of dealing with this is to provide for dividend income to be part in priority to holders of the VCs’ class of shares. This can be extended to provide for a fixed dividend (normally expressed as a percentage of the subscription price paid for the shares) to be paid, or more likely accrued – start-up companies tend not to be cash rich to pay dividends – pending the sale or flotation of the company. These shares, if they carry fixed dividend rights, are conventionally known as preference shares
  
  
  
• Preferential rights to capital – here the approach is, in principal, to ensure that, when the company is liquidated (hopefully on a sale or flotation, but also on a winding up of the company), the VCs receive their money back (or some sort of uplift on their money back) before the other shareholders participate in the liquidation. The effect is to “rebase” the company’s growth from the date of the VC investment. If the company does not grow much or shrinks prior to liquidation, the VCs take all of the proceeds, but, if the company grows ten times before disposal, the proceeds are split almost pro rata
  
  
• EXIT – venture capitalists look for comfort that their investment will be realisable, usually within 3 to 5 years. Clauses are required in the subscription agreement which provide for the company to be prepared for flotation on a strict timetable and may allow the VCs to appoint advisers as required under the relevant stock exchange rules. Many start-up companies are sold prior to flotation, rendering such clauses redundant.
  
  
• SHARE OPTIONS – venture capitalists are often strongly wedded to the use of options to incentivise the company’s management. These are often combined with ratchet arrangements which adjust the proportion of the company’s equity owned by the management team depending on the overall price for which the company is sold. It is common to use a mixture of tax efficient Enterprise Management Incentive options (which have a cash limit on the value of the options that can qualify) and unapproved options (which are treated as income in the hands of the recipient when the option is exercised).

With our wide and long experience in venture capital driven investments, VS&H can offer competitively priced advice to both investors and companies.