Top ten provisions an entrepreneur should consider when planning early-stage rounds

Monday 13 December 2021

Hermann Knott 
KUNZ, Cologne 


A report on the joint session of the Closely Held and Growing Business Enterprises Committee and the M&A Law Committee, with support from the European Regional Forum, the Securities Law Committee, the Healthcare and Life Sciences Committee and the Technology Committee at the From Start-Up to IPO Conference in Paris


Monday 18 October 2020


Andreas Kloyer Luther, Frankfurt; European Regional Forum Liaison Officer, IBA Closely Held and Growing Business Enterprises Committee
Luciana Tornovsky Demarest, São Paulo; Secretary and Latin American Regional Forum Liaison Officer, IBA Closely Held and Growing Business Enterprises Committee


Ivan Delgado Perez-Llorca, Madrid; Conference Quality Officer, IBA Closely Held and Growing Business Enterprises Committee
Lise Lotte Hjerrild Horten, Copenhagen; LPD Council Member, Senior Vice Chair, IBA Women Lawyers’ Interest Group
Elke Napakoj bpv Hügel, Vienna
Louis Oudot de Dainville Gide, Paris
​​​​​​​Ilona Zekely EPAP, Moscow; Human Rights Officer, IBA European Regional Forum


The overall theme of the first session of the Paris Conference was the top ten provisions by which a founder can retain a certain level of control over a company while at the same time accommodating the needs for financing the growing business.

The ten provisions and how they operate

1. Introducing different classes of shares – Andreas Kloyer
In this regard, liquidation preferences are an important protection for the financial risk taken by the investor. Granting liquidation preferences may be considered as the consideration granted by the founder(s) in exchange for keeping a relatively high quota of voting rights, as they are driving the business.

2. Reserved matters (veto rights) – Luciana Tornovsky
Veto rights are granted to minority shareholders such as VC or other financial investors. The list of reserved matters in the shareholders’ agreement is often an object of detailed negotiations. The panel discussed the interests of the parties involved and aspects relating to the catalogue of typical veto rights

3. Anti-dilution provisions – Tornovsky
They serve to protect the investor in a down-round (ie, when the value of the business in a subsequent round is lower than in the previous one) or in case further financing rounds are needed. They also serve as an instrument to protect the founder.

4. Right to appoint board member(s) – Kloyer
The board is the reflection of the interests of the different shareholders in the company. The process to select the chairman of the board was discussed. The debate also revolved around the influence the founder should have on the board having the right to appoint members.

5. Management of Company – Tornovsky
With regard to the management of the company an important topic was who should be those involved in management. The founder and the members of their management team certainly have developed a strong knowledge of the industry in which the company operates. But the founder may lack the management expertise required especially in the face of the growth of the company. The relationship between the board and the management team was also discussed. Another point of discussion was the role of the chief executive – should he be a strong leader or more of a coordinator?

6. Managing liability risks – D&O – Kloyer
The discussion of the panel members related to the types of risks the members of the management and the board may face. D&O insurance is financial loss liability insurance. Another instrument frequently used in the United States is the directors’ liability indemnification agreements. The object of the discussion were the limitations of such instruments, for example, in the context of criminal cases.

7. Restrictions on share transfers/lock-ups – Tornovsky
In most cases, the financial investor has an interest that the founder will stay with the company. That period could be defined in years or tagged to certain events, the latter being the preferred way as was clear from the discussion. A distinction needs to be made between the role of restrictions on share transfers relating to periods prior to or after an IPO, if that is the exit route.

8. Preemptive rights/drag-along/tag-along – Kloyer
The effects of these clauses also outside the exit mechanism were discussed. They also have a role in case of disputes among the shareholders. Another important aspect discussed relates to the way in which these provisions are being enforced.

9. Definition of good/bad leaver (call option) – Tornovsky
An important aspect is how to define the terms. The discussion related to the consequences of the founder being considered a bad leaver. Encountering a bad leaver may have an impact on the valuation of the business. In negotiations, the bad leaver/good leaver clause is often the object of considerable debate.

10. Exit mechanisms – Kloyer
​​​​​​​The market conditions regarding various exit strategies were discussed. The timing of when discussing exit rights is also important: at the beginning of the start-up, or when financial investors get involved? From a founder’s perspective, there is an interest to resolve matters early on, but that may have a discouraging influence on investors for whom the exit mechanism is an important factor.

Overall, the one-hour session was a great mix of lively discussions among the members of the panel with involvement of the audience.