Investing in a startup - vischer.com

Investing in a startup – key considerations for founders and investors•

22.09.2021

SCCC Legal Chapter 2021 Forum

Lukas ZÜST, Attorney at Law, Head China Desk, VISCHER

YAO Qinqin, Legal Expert China Desk, VISCHER

1. Strategic considerations on the venture's structure

2. Financing: debt vs. equity

3. General investment process

4. Investment agreement and shareholders' agreement

5. Preferred shares vs. common shares

6. Key takeaways

VISCHER | Investing in a startup - key considerations for founders and investors 2

Topics•

VISCHER | Investing in a startup - key considerations for founders and investors

Option 1

1. Strategic considerations on the venture's structure•

3


Option 2


4


Option 3


5


2. Financing: debt vs. equity•

6

Debt

Equity

• Repayment with interest

• Taxable profits reduced by interest expenses

• No discussion on valuation

• Debt ratio increased

• Profits and losses shared

• Participation in corporate governance

• Dilution on shareholding


Chinese cross-border investment specifics: foreign exchange

control

• Example: overseas loans from a non-financial company incorporated in

China

In existence (over 1 year)

Equity-related relationship with the foreign borrower

Lending balance control (30% of owner’s equity unless otherwise provided)

Interest rate (must be over 0)

Term (in principle 6 months – 5 years)


7


Debt: Convertible loan

• Swiss side

Right to convert the loan into equity of the company at a financing round, trade sale or specific date

Conversion rights must be backed by irrevocable commitment of shareholders or conditional capital

Conversion at a discount of 10% to 20%

• Chinese side

Based on contractual agreement, with possible restrictions

Possible practice: loan contract + convertible loan contract

When it is converted to equity in China, set-off is possible; with approval from/filling at MOFCOM, SAFE will process the transfer from debt to equity.


8


Equity: capital increase vs. transfer of shares

• Transfer of Shares

Selling or reallocating shares from the founders as such does not bring funds to the company. Additional steps will be required (loan, à-fonds-perdu contribution, etc.)

• Capital Increase

Company issues additional shares for a subscription price per share equal or higher than the par value


9


Investing in a startup in both China and Switzerland usuallyfollows these international standard steps:

3. General investment process•

10

sign Non-disclosure agreement

Exchange Confidential BD and documents

Negotiate pre-money valuation

Conduct due diligence

Negotiate and sign Term Sheet

Draft IA and SHA

Review and

negotiate IA and SHA

Prepare annexes and

closing documents

Sign

Close


4. Investment agreement and shareholders' agreement•

11

Investment agreement / Share subscription agreement

• Company agrees to increase share capital by issuing additional shares

• Investors agree to subscribe to new shares and pay the agreed subscription price

• Closing mechanics defer in China and Switzerland

Shareholders’ agreement

• Regulates the relationship between the parties, in particular:

Corporate Governance

Procedure to follow in case of share transfer


5. Preferred shares vs. common shares•

12

Swiss side

• Preferred shares enjoy preferential (property) rights vis-à-vis common shares

• Contractual arrangement in investment agreement and shareholders agreement

• If included in the articles of association, also enforceable against the company: better protection of the preferred shareholders

• The company may issue preferred shares within the limits of mandatory laws and principles of company law

• Preferential rights mentioned in the law relate to:

Dividends

Liquidation preference

Subscription rights


5. Preferred shares vs. common shares•

13

Chinese side

• Based on contractual agreement upon negotiation

• One-time payment is common in practice unless there is valuation adjustment.

• Liquidation preference:

Different views; there are court cases supporting the associated rights

Possible alternatives to cope with the uncertainty: repurchase + early exit; compensation


• Evaluate thoroughly the structure of your investment.

• As a rule, startup investment process in China and Switzerland is comparable.

• China: Freedom of contract is a basic principle, while international investment is also subject to ODI and FDI legislation.

• Switzerland: Consider interaction between contractual arrangement and company law.

6. Key takeaways•

14


Contact information•

15

Lukas ZuestCounselHead China DeskSwiss Attorney at Law, [email protected]+41 58 211 34 35

YAO Qinqin, LL.M.Legal Expert, China [email protected]+41 58 211 36 56

mailto:[email protected]

mailto:[email protected]

ZurichSchützengasse 1P.O. Box8021 Zürich, SwitzerlandT +41 58 211 34 00

www.vischer.com

Thank you.

BaselAeschenvorstadt 4P.O. Box4010 Basel, SwitzerlandT +41 58 211 33 00

GenevaRue du Cloître 2-4P.O. Box1211 Geneva 3, SwitzerlandT +41 58 211 35 00

Investing in a startup - vischer.com

Documents

Transcript of Investing in a startup - vischer.com