We have amended the Preferred Shares documentation. It is cool to see that the Capital Waters model documents are more and more used as a benchmark for balanced investment documents in many venture deals in the Netherlands and beyond. We are aware of our responsibility in that respect, so we have not made any changes lightly. We have gathered feedback from our users and looked carefully at market trends and asked our Expert Panel to once again review the documents and come up with any suggestions for improvement.
We have amended the Preferred Shares documentation more than we probably ever did. It is cool to see that the Capital Waters model documents are more and more used as a benchmark for balanced investment documents in many venture deals in the Netherlands and beyond. We know our responsibility in that respect, so we have not made any changes lightly. We have gathered feedback from our users and looked carefully at market trends and asked our Expert Panel to once again review the documents and come up with any suggestions for improvement.
The result is now online. Although we fully support the changes we have made, the documents are not intended to be a one-size-fits-all, so users remain free to adjust the documents to tailor to their needs, provided they take into account the license terms as shown on the front page of the documents.
We want to highlight the following changes:
- As we already changed in the most recent version of the Capital Waters Convertible Loan Agreement, we let go of the license condition that any changes to the Capital Waters standard must be shown in a compare version attached to the document. It is still a requirement for using the Capital Waters documents to show your counterparty what changes you have made to the standard, but you are free to choose in what form or manner.
- Since many preferred share deals are preceded by a convertible loan or SAFE round, we have included an optional clause about the conversion of convertible loans in the Subscription Agreement. For the equity investment itself, the standard still caters to a tranched investment (and share issue), but we have made clear that this is just an option, so the exception against the default position where the investment will be made in one go.
- In the updated documents, warranties are still granted against specific disclosures in a disclosure letter, although we see in the market many preferred share deals (also early stage) where the entire data room is considered disclosed information. We think the specific disclosure mechanism still fits most seed financing deals.
- In case there are multiple investors investing in the same round, we have included that any claims under the warranties must be supported by the investor majority (of a particular round), to prevent that one small investor may trigger an indemnification procedure that is considered not in the interest of the company and the investors by the majority of them.
- We have removed the requirement to add certain annexes to the warranty schedule such as the company’s articles of association and the financial statements but instead referred to the disclosed information. We have added a few warranties regarding open-source software and data protection while deleting a few others that were considered less relevant.
- In the Shareholders Agreement, we have included the right of first refusal in a separate clause with a bit more detail instead of referring to the mechanism set out in the bylaws. With regard to the drag along we have let go of the requirement to grant existing shareholders the right of first offer to facilitate an exit.
- We have included a clause regarding voluntary and mandatory conversion of preferred shares into common shares at the occurrence of a qualified IPO or with the consent of the investor majority. We have also added some additional items to the reserved matters schedule related to initiating an exit or IPO.
- We have included a mandatory offer clause for all shareholders (including the founders) in case of bankruptcy and a criminal offense.
- For founders, we have maintained the vesting clause, but changed this to allow for limiting vesting to a certain percentage of the shares held by each founder. In the leaver provision, we have added an early leaver category (founder leaving on his/her own initiative in the lock-up period) in which case he/she will maintain 50% of the value of his/her vested shares (in the currently published version early leaver is considered a bad leaver who loses all shares at nominal value).
We hope you will appreciate the new model documents and use them in dealmaking as so many of you did already. We will keep on working on providing startup founders and investors better (and free!) access to easy-to-use, balanced, and market-standard investment documents in order to save time and money when doing venture deals.
Don Ginsel & Sjoerd Mol
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