INTRODUCTION

A traditional merger and acquisition (“M&A”) deal involves a company buying shares or assets of a target that generally has some immediate or near-term accretive value to its business, through opening new markets, hastening product development and time to market, or increasing market share. On the other hand, venture capital (“VC”) involves VC funds or firms investing in start-ups that have high growth potential, expecting that their investment generates multi-fold returns when the company subsequently goes public, or gets sold. Unlike a traditional M&A deal, the start-up and the investor(s) may not be from the same industry, and thus the investor’s interest in the start-up may be a purely financial one. The investor’s stake is sold later on, or upon an exit event such as an initial public offering (“IPO”) or acquisition.

Like M&A deals, VC deals come in all sizes and across industries, from a “friends and family” deal where investors are all very familiar and trusting of the start-up founders, to deals where a company is seeking to attract institutional investors all across the globe. There are also many roles within a VC deal which a lawyer can take, such as advising the VC fund (or the corporate venture capital units within an established company) seeking to invest in the start-ups, the investor(s) that are backing the VC fund, or the start-ups themselves. In the last scenario, the start-up may expect you to serve as its “external general counsel” and seek advice on a wide range of issues: from its initial fundraising transactions, to more day-to-day issues such as employment, regulatory compliance, corporate governance and corporate secretarial matters, and even up till the end when it secures a successful exit.

WHAT YOU CAN EXPECT

• Deal Structuring – An early-stage investment in a start-up can be structured in various forms such as a note or preference share. These can be converted into preference shares or ordinary shares (as applicable) at the option of the investor or also automatically converted upon certain events such as a Qualifying IPO. Where the investor holds preference shares in a company, it may come with certain preferential rights, such as a right to receive proceeds first in the event of a liquidation or sale of the company, or a distribution of dividends. As a VC investment can also happen across different rounds spread across many years, you will also need to be familiar with the investment terms from the earlier fundraising rounds.
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• Due Diligence – Investors or promoters (who help raise money for investments) conduct legal, commercial, financial and other necessary due diligence to examine whether there are any critical issues that may require a re-think of the investment decision. Some areas to examine during due diligence include ascertaining the full capital structure and group structure chart, ensuring the company has the necessary intellectual property rights or licences to operate, checking employment contracts of key staff, and ascertaining ownership of critical assets.
• Term Sheet and NDA – Initial documents such as an NDA, letter of intent, term sheet, and a memorandum of understanding may be executed to summarise the key commercial terms of the investment, and bind the investors to keep information received in the course of due diligence and discussions confidential.
• Key Investment Agreements – Key documents such as the subscription agreement, shareholders agreement, investor rights agreement set out the rights that the investors will have in the company. Examples of key rights include anti-dilution protection, pre-emption rights, right to appoint a director or observer to the board, voting rights, reserved matters, access to information, conversion rights (and the conversion ratio), dividend rights, liquidation preference (and the liquidity events), rights in the event of a sale such as a drag-along right, tag-along right and right of first refusal. In the Singapore context, a set of sample documents called the Venture Capital Investment Model Agreements (VIMA) is available on the website of the Singapore Venture Capital & Private Equity Association.
• Employment –As a start-up’s value can be dependent on it hiring, incentivising and retaining good talent, you will also need to be familiar with how to set up an employee share option plan (ESOP), performance-based remuneration and incentives, and enforcement of confidentiality and non-compete obligations against departing employees.
• Fund Formation – Besides advising a VC fund on its investment into portfolio companies, you may also advise the VC fund on the establishment of its fund vehicles (or subsequent funds when the earlier fund has fully invested its capital). Such fund formation work often involves providing tax and regulatory advice on the structuring of fund (whether through a limited partnership or Singapore’s variable capital company structure, and the domicile of the entities) and involvement in preparing of documents such as the private placement memorandum, limited partnership agreements, side letters, subscription agreements, and investment manager agreements.
• Regulatory Compliance – When advising a VC fund on its establishment and ongoing business, you will also need to be familiar with the requirements for addressing the regulatory and licensing obligations of operating a fund. In Singapore, the Monetary Authority of Singapore (MAS) has simplified rules for VC funds, or VC managers of the funds, under the Venture Capital Fund Manager (“VCFM”) regime, which sets out the admission and licensing criteria and ongoing business conduct requirements. Under the simplified rules, generally, VCFMs do not invest in listed companies or markets, and serve only accredited or institutional investors.