What Venture Money Buys

1.1Venture capital in one paragraph

Venture capital is money that funds invest in young companies in return for new shares, and the company spends that money on growth. The fund is paid only when the company is sold one day, and that sale is the exit. This workbook follows one company from its two founders to its sale, through the documents of each funding round. You read them as a junior lawyer on the deal.

1.2Why a fund invests in a company that pays nothing yet

A fund invests other people's money. It raises that money from pension schemes, universities and wealthy families, and must hand it back within about ten years. So the fund cannot wait for ever. It needs each company sold inside that window.

Most venture investments return nothing. A fund expects most of its companies to fail, a few to return the money, and one or two to pay for the whole fund. It cannot tell in advance which is which. That shapes what it asks for:

• Protection when things go badly. A liquidation preference pays the fund back first if the company is sold cheaply.
• No surprises. The company may issue shares, sell the business or change its constitution only with the fund's consent.
• A board seat. The fund does not want to run the company, but it wants to see problems early.

Each protection costs the founders something. A preference leaves less for their shares on a cheap sale, and a company that must ask permission moves more slowly. That is their side of almost every negotiation in this workbook. The fund's side is that it is writing a large cheque into a future nobody can see.

1.3The company, the people and the rounds

The company is Solaris Digital Assets Europe Limited. It runs Helia, a platform that holds and trades digital assets for its customers. Because Solaris handles customers' assets, the Central Bank of Ireland supervises it. Solaris is an Irish company, but its Investment Agreement is governed by English law.

Two founders set Solaris up with a few thousand euros. Over the next five years investors put in several million euros, round by round. Then Solaris was sold for €42,000,000.

These are the main people in the story:

The story runs in eight stages. The last column shows the shares on the register after each one.

In the second and third stages the register does not move. That money came in before anyone agreed a price, and it turned into shares only at the Series A. Chapter 15 shows how the Exchange left one shareholder.

Every fight in this story is settled twice. It is settled first on paper, in the documents signed in the years before the sale. It is settled again when the sale money is paid, because the paper then decides who gets it. The sale is signed months before that money moves, so keep both dates in the diary.

1.4What an investor buys: a bundle of rights

Ask what an investor got for its money and the quick answer is a percentage. The real answer is a bundle of rights, in four parts: economics, control, information and liquidity.

Later in this story, two holders each had 200 shares in Solaris. One held preference shares. It was paid before the ordinary shares on a sale, and it voted in a class whose consent the company would one day need. The other held ordinary shares, was paid last and could block nothing.

So when someone says a holder owns a fifth of a company, ask which class of share it holds. The rights come with the class, not with the number of shares.

This is why venture documents look so different from the sale of a whole company. In a sale the buyer pays a seller, and can sue the seller later if something was wrong. On a round the money goes into the company and is spent, so there is no seller to sue. The investor's protection has to be built in advance, in class rights and consent lists.

1.5The cap table and the register of members

A cap table (capitalisation table) lists who holds which shares, class by class, with the percentages that follow. It is usually a spreadsheet. A new one is printed whenever shares are issued or change hands.

The cap table is not the legal record. That is the register of members, which the company must keep by law. When the two disagree, the register wins. A cap table is often out of date, so always check it against the register.

Real cap tables carry fractions of a share, of a cent and of a percentage point. The tables in this workbook are designed so that nothing in them does.

The Investment Agreement is the document this workbook reads clause by clause. Its first recital records how the register began:

On day one the register showed two names and nothing else. The founders paid €1 a share, the nominal value (the fixed face value of each share). Later investors paid hundreds of euros a share, and everything paid above the nominal value is share premium. Chapter 2 explains why the difference matters.

Spend ten minutes with the document now. The note at the top says what it is, and the parties clause says who signed it. The Cap Table Record shows every stage, from the founders' shares to the single line a buyer read years later.

1.6Every percentage needs a basis

A percentage means nothing until you know what it is a percentage of. Two bases are in everyday use:

• The issued register: the shares actually issued and entered in the register, and the votes they carry.
• Fully diluted: the register plus shares not yet issued, such as the option pool kept for staff.

The Investment Agreement defines the second basis, and its last sentence states the rule:

So votes, control and every legal or regulatory threshold are measured on the register. What a holding is worth, and what a round costs, are measured fully diluted.

Take the Series A. The parties agreed that Solaris was worth €8,000,000 before the new money, and counted it as 8,000 shares. So one share cost €1,000. Meridian and Rowan Hill paid €2,000,000 for 2,000 new shares, and the count became 10,000.

Meridian now held 2,400 shares: 1,800 bought in the round and 600 from its earlier loan notes. That is 24% of the 10,000, fully diluted. But 2,000 of the 10,000 were the option pool, issued to nobody. The register carried 8,000 shares, and on the register Meridian's 2,400 were 30%.

Both figures are true, and each answers a different question. Meridian's money bought 24% of the company, fully diluted. But a holder of more than 25% of the register is a beneficial owner, whom the regulator must check. On 30% Meridian was over that line, so the Central Bank of Ireland checked the people who control Meridian before the round could complete.

Elena Marsh also held 2,400 shares, and she never sold one. She went from 60% of the register to 24% fully diluted after the Series A, and 12% after the Series B. Her holding never shrank, but the total grew. That is dilution, and it is the ordinary shape of a founder's life.

1.7Your job

On a round the partner negotiates the terms. The junior keeps the machinery that makes the deal work, in a law firm or in-house. You will usually own four things:

• The cap table: build it, check it against the register, and show what the round will do.
• The completion checklist: every board minute, resolution, allotment and share certificate, in the right order.
• The conditions tracker: what must happen before money moves, such as the regulator's check.
• The company filings: the register written up, allotments filed and the constitution kept current.

The completion figures come from your cap table. If its total is wrong, every price and percentage is wrong too. A step taken out of order may not work at all. Filings matter for years: Solaris once filed an annual return six weeks late, and a buyer's lawyers still asked about it.

When you are handed a cap table, check five things:

• The share counts add up to the stated total.
• Each percentage column names its basis: the register or fully diluted.
• The issued total matches the register of members, not the last spreadsheet.
• Anything off the register, such as options or convertible money, is listed.
• Every class in the table exists in the constitution, which is where its rights come from.