28 de octubre de 2020
Mediante el Decreto Ejecutivo No. 722 de 15 de octubre de 2020, el Ministerio de Seguridad Pública de la República de Panamá creó dentro de la categoría de residente permanente por razones económicas, la subcategoría de Residente Permanente en calidad de Inversionista Calificado.
Esta nueva subcategoría entró en vigor a partir del 16 de octubre de 2020.
Opciones y requisitos
Con este nuevo decreto, se otorga residencia permanente en una sola etapa a aquellos extranjeros que inviertan un monto mínimo de $500,000.00 proveniente de fuente extranjera, a título personal o a través de una persona jurídica.
Para solicitar el Permiso de Residencia Permanente en calidad de Inversionista Calificado, existen cuatro opciones:
- Por razón de Inversión Inmobiliaria:
- Inversión mínima de $500,000.00 libre de gravámenes.
- Además de los requisitos estipulados en este Decreto Ejecutivo, se debe aportar la Certificación del Valor del Bien Inmueble emitida por la Autoridad Nacional de Titulación de Tierras.
- Por razón de Inversión Inmobiliaria mediante un contrato promesa de compraventa:
- Inversión mínima de $500,000.00.
- Se debe realizar por medio de un depósito de fideicomiso manejado por un banco o empresa fiduciaria del país.
- Además de los requisitos estipulados en este Decreto Ejecutivo, se debe aportar: (i) copia autenticada del contrato de compraventa, debidamente inscrito en el Registro Público de Panamá y, (ii) copia autenticada o el original del contrato de fideicomiso.
- Por razón de inversiones realizadas a través de una Casa de Valores con licencia aprobada por la Superintendencia del Mercado de Valores de Panamá:
- Inversión mínima de $500,000.00.
- Esta inversión debe ser en títulos valores de emisores, cuyos negocios incidan en el territorio nacional, a través de la Bolsa de Valores de Panamá.
- Además de los requisitos estipulados en este Decreto Ejecutivo, se debe aportar: (i) certificación emitida por la Casa de Valores, (ii) copia autenticada de la resolución mediante la cual se le concede la licencia a la casa de valores y, (iii) certificación emitida por la Superintendencia del Mercado de Valores de Panamá.
- Por razón de Inversión en Depósito a Plazo Fijo en el Sector Bancario:
- Inversión mínima de $750,000.00, libre de gravámenes.
- Además de los requisitos estipulados en este Decreto Ejecutivo, se debe aportar: (i) copia autenticada por el banco emisor del certificado de depósito a plazo fijo, indicando su titular, el valor y el plazo del documento y, (ii) certificación del banco que haga constar la existencia del depósito, su titular, el valor, el plazo, que el mismo se encuentre libre de gravámenes y que los fondos provienen del extranjero.
Para mantener la Residencia Permanente en calidad de Inversionista Calificado, es necesario que la inversión se mantenga por un periodo mínimo de cinco (5) años. Si la inversión cesara o deja de existir antes del cumplimiento de este término, dará lugar a la cancelación oficiosa de la residencia permanente.
Las solicitudes bajo esta nueva categoría migratoria se recibirán a través de la Ventanilla Única de Inversiones del Ministerio de Comercio e Industrias; y deberán ser resueltas en un periodo no mayor de treinta (30) días hábiles, contados a partir del momento de la recepción de la solicitud.
Se permite que, a través de apoderado especial, las solicitudes sean presentadas previo al ingreso al territorio nacional del solicitante y sus dependientes.
Durante los primeros 24 meses posteriores a la entrada en vigencia del presente Decreto Ejecutivo, la inversión por razones de inversión inmobiliaria, de forma directa o por medio de contratos de promesa de compraventa, podrá ser por la suma de $300,000.00 en la compra de un bien inmueble en Panamá, libre de gravámenes.
Podrán solicitar el cambio de estatus migratorio, aquellos extranjeros que, a la entrada en vigencia de este decreto, mantengan en trámite o hayan iniciado solicitudes de Permiso Provisional de Permanencia en calidad de Solvencia Económica Propia por Inversión en Bienes Inmuebles, en el año 2020.
Para más información en estos temas, por favor contactar a nuestro equipo de Derecho Migratorio al correo electrónico [email protected].
Morgan & Morgan advised Avianca Holdings, S.A. in connection to a over US$ 2 billion debtor-in-possession financing structure pursuant to its reorganization plan under Chapter 11 of the United States Bankruptcy Code.
Panama, October 26, 2020. Morgan & Morgan acted as Panamanian counsel to Avianca Holdings, S.A., as Debtor; and Latin Airways Corp., Taca, S.A., AV International Investments, S.A., AV International Holdings S.A., AV International Holdco S.A., AV International Ventures S.A., AV TACA International Holdco, S.A., International Trade Marks Agency Inc. and Aviacorp Enterprises, S.A., as Guarantors, in connection with the transactions contemplated by a debtor-in-possession financing consisting of US$ 1.27 billion Tranche A senior secured financing and US$ 722 million Tranche B secured subordinated loan. The financing will help Avianca improve its liquidity and provide support to its operations.
Partners Francisco Arias and Aristides Anguizola, Associate Allen Candanedo, and International Associate Miguel Arias participated in this transaction.
Morgan & Morgan advised First Quantum Minerals Ltd. in connection with a Senior Notes Offering for an amount of up to US$1.5 Billion
Panama, October 26, 2020. Morgan & Morgan acted as Panamanian counsel to First Quantum Minerals, Ltd. in its offering (under Rule 144A of the U.S. Securities Regulation) of US$1,500,000,000 in aggregate principal amount of 6.875% senior notes due 2027.
Partners Inocencio Galindo and Aristides Anguizola participated in this transaction.
Morgan & Morgan advised Banistmo, S.A., in an up to US$315.6 million loan agreement for the financing of the acquisitions of CDNOs related to Line 2 of Panama´s City’s metro system.
Panama, September 29, 2020. Morgan & Morgan provided legal counsel to Banistmo, S.A., as Administrative Agent and Collection Agent, in connection with a loan agreement for an amount of up to US$315,601,312.14 between CitiGroup Global Markets, Inc. and UBS Securities LLC, as Joint Lead Arrangers and Bookrunners, various local and international banks as lenders, Banistmo, S.A., as Administrative Agent and Collection Agent to finance the acquisition by the borrower of the CDNOs.
The transaction included an agreement with Metro de Panama, S.A. to exchange the CDNOs, acquired in order to differ payment date, for consolidated CDNOs (“Aglutinados”).
Partner Kharla Aizpurua Olmos represented Morgan & Morgan in this transaction.
You are undertaking a project for a new business, a startup. You already have the financial/commercial side well thought-out, and have commissioned a designer to sketch a logo and design a corporate identity under the brand you have decided to use. You buy stationery, signs, business cards, among others. You commence the required process to obtain a notice of operation (Aviso de Operación) at the Ministry of Commerce and Industries and, at that moment, you realize that there is not one, but several businesses whose names are identical or confusingly similar to yours.
How did this happen?
To answer this question, we must first understand what a trademark is and what is its purpose. A trademark is a distinctive sign or set of signs (below we will explain what signs can constitute trademarks) that allows us to differentiate the products, services and trade name of one company from those of another.
The main feature of a trademark is its distinctive character, that is, it must be capable of distinguishing a product and/or service from others that already exist, in order for a consumer to identify, distinguish and differentiate said product and/or service from an existing one that is identical or similar in nature.
What type of signs can constitute trademarks? The applicable Panamanian law, Law 61 of October 2012, dictates that trademarks may consist of: words or a combination of words; images, figures, symbols and graphics; letters, numbers and combinations; three-dimensional shapes; colors in their different combinations; sounds; smells or tastes; or any combination of any of the previously mentioned elements.
So, based on the above, what are the different types of trademarks?
- Fanciful Marks: Those that provide the greatest distinctive strength, since they are distinctive words or signs that did not previously exist and were conceived / created for the purpose of distinguishing a specific product or service, such as “Adidas” or “Starbucks”.
- Arbitrary Marks: Those that are nothing more than brands made up of words with a well-known meaning, but the key element is that said meaning has nothing to do with the nature of the product or service they seek to identify, such as “Dove” for soaps and shampoos or “Apple” for computers. These names have a common meaning that is different from the products they represent.
- Suggestive Marks: Those which, as its name indicates, suggest the nature of the product or service or some of its characteristics, without directly describing it. For example, “Netflix” qualifies as a suggestive mark, since the word “net” suggests the use of the internet and the word “flix” is a shortened version of “flicks”, which is a colloquial way of saying “movies”.
- Descriptive Marks: Refers to words or sets of words that identify the characteristics or elements that make up a product or service and serve to describe that product. Examples of descriptive marks are “General Electric” for an electricity company and “Telefónica” for a mobile communications company.
- Generic Marks: Those that, because of their constant use, are merely the common name used to identify a product or service, such as “Kleenex”.
Before investing in the corporate image of a business, an entrepreneur or startup founder must verify the existence of identical or similar marks, to the extent that those similar marks could cause confusion. This is accomplished by carrying out a search or verification of trademarks that are in the process of being registered or have been registered with the General Directorate for Registration of Industrial Property (DIGERPI, for its name in Spanish), and in the Panama Emprende system, since, with regards to intellectual property, Panama recognizes a right over a trademark to those persons who first used the trademark within Panama for commercial purposes. This verification can be carried out electronically, through queries in DIGERPI’s database, or in writing, by submitting a search request with said entity.
In any case, consulting with an intellectual property lawyer is advisable, so as to properly interpret the results of a trademark search and/or provide advice on the procedure to register a trademark.
With regard to ideas, we note that a single idea is not protected intellectual property. Under the prism of copyright, the formal expression of ideas is protected. This means that the ideas must have been affixed or embodied in some material mean, such as a book, a canvas, an audiovisual work, an architectural plan, a poem or a song, to enjoy copyright protection.
Finally, the main advice before investing in the name and image of a new business, is to consult the various sources available with respect to trademark and notice of operations (Aviso de Operación), and seek legal advice from an experienced attorney in the field to avoid losing what was invested in promotional materials, creating an image, time and, in the worst case, being involved in a trademark dispute. We are at your service for any queries you may have on these issues.
For more information on these topics, please contact:
MORGAN & MORGAN
Email: [email protected]
Panama, October 2, 2020. Once again, Morgan & Morgan receives top rankings in the recently released Chambers & Partners Latin America Guide 2021, a key reference point of Latin American top law firms.
Morgan & Morgan has been recommended in several practices due to the firm´s excellent performance and prominent work in each one of these areas.
Likewise, the directory classifies within the top Bands the following attorneys of the firm:
- Inocencio Galindo: Banking and Finance / Projects and Energy / Corporate and M&A.
- Francisco Arias G.: Banking and Finance / Capital Markets / Corporate and M&A.
- Ramon Varela: Banking and Finance, Projects and Energy.
- Roberto Vidal: Corporate and M&A.
- Kharla Aizpurua Olmos: Banking and Finance.
- Ricardo Arias: Capital Markets.
- Ana Carolina Castillo Solis: Projects and Energy.
- Allen Candanedo: Intellectual Property.
- Maria Eugenia Brenes: Intellectual Property.
- Simon Tejeira Q.: Dispute Resolution.
- Jose Carrizo: Dispute Resolution.
- Luis Vallarino: Dispute Resolution.
- Jazmina Rovi: Shipping.
- Juan David Morgan Jr.: Shipping (Litigation).
- Francisco Linares: Shipping (Litigation).
Congratulations to all of them, and thanks to our clients for trusting us as their legal advisors in Panama.
Panamá, 1 de octubre de 2020 . Morgan & Morgan se complace en anunciar que nuestra firma ha sido preseleccionada en los premios Chambers Law Americas Awards 2020 como “Bufete de abogados de Panamá del año”, uno de los reconocimientos más reconocidos en la profesión legal.
Esta distinción es el resultado de una extensa investigación realizada por un equipo de más de 200 analistas que refleja el excelente servicio al cliente de la firma de abogados en áreas de práctica clave, incluidos logros notables y un trabajo significativo durante los últimos 12 meses.
Este año, los premios se realizarán virtualmente el viernes 30 de octubre de 2020.
Morgan & Morgan advised Panasolar Generation, S.A. in an issuance of corporate green bonds for US$15,500,000.00.
Panama, September 29, 2020. The green bonds are certified under the Climate Bonds Certification Scheme run by the Climate Bonds Initiative, an international, investor-focused non-profit organization, and the only organization working solely on mobilizing the $100 trillion bond market for climate change solutions.
The Climate Bonds Standard and Certification Scheme is a labelling scheme for bonds, loans & other debt instruments. Rigorous scientific criteria ensure that it is consistent with the goals of the Paris Climate Agreement to limit global warming to under 2 degrees. The scheme is used globally by bond issuers, governments, investors, and financial markets to prioritize investments that genuinely contribute to addressing climate change. This certification is the main international award recognizing the best practices in green finance, covering green bonds, loans and significant market developments in climate and transition investments.
The green bonds also have a verification by Pacific Corporate Sustainability (PCS) of the Pacific Credit Ratings group.
The green bonds have been registered with the Superintendency of Capital Markets of Panama and will be listed on the Panama Stock Exchange. MMG Bank acted as arranger and is engaged as bookrunner and paying agent of the green bonds.
Partners Roberto Vidal, Kharla Aizpurua Olmos and Ricardo Arias, and associate Cristina De Roux participated in this transaction.
Autoridad de Aeronáutica Civil anuncia reactivación de vuelos internacionales y el Ministerio de Salud modifica las medidas sanitarias para el ingreso de personas a Panamá
I. AUTORIDAD DE AERONÁUTICA CIVIL (AAC)
La Resolución No. 150/DG/DJ/AAC del 23 de septiembre de 2020 de la ACC (en adelante la “Resolución”), publicada en Gaceta Oficial Digital el mismo día, prorroga la suspensión de todos los vuelos internacionales por 19 días calendario adicionales, hasta el 11 de octubre del 2020, por razones de salud pública.
- Se excluyen de esta suspensión, las operaciones aéreas que fueron permitidas por el Decreto Ejecutivo 300 del 31 de julio de 2020, el cual estableció el Centro de Operaciones Controladas para la interconexión de aviación comercial internacional en el Aeropuerto de Tocumen.
- A través del Centro de Operaciones Controladas, se seguirá permitiendo las operaciones aéreas para (i) el tránsito de pasajeros, (ii) la salida de pasajeros y (iii) la entrada controlada de panameños o residentes en Panamá.
- Se mantiene la excepción de vuelos internacionales humanitarios y los necesarios para transportar productos, equipos médico-hospitalarios, medicamentos, vacunas y otros insumos de salud pública.
- La reapertura y reactivación de la aviación internacional será a partir del 12 de octubre de 2020.
- Esta Resolución entrará a regir a partir del 23 de septiembre de 2020.
II. MINISTERIO DE SALUD (MINSA)
El Decreto Ejecutivo No. 1089 del 23 de septiembre de 2020 del MINSA (en adelante el “Decreto”), publicado en Gaceta Oficial Digital el mismo día, modifica las medidas sanitarias establecidas para el ingreso a Panamá de personas nacionales, residentes o extranjeras, mientras se mantenga el Estado de Emergencia Nacional.
- A partir del 12 de octubre de 2020, toda persona nacional, residente o extranjero que ingrese a Panamá, deberá presentar a su llegada al país, el Certificado de Prueba de Hisopado/PCR o Antígeno negativo, con un máximo de 48 horas y no requerirá realizar el aislamiento
- En caso de que la persona no cuente con el Certificado de Prueba de Hisopado/PCR o Antígeno negativo, tendrá que realizarse una prueba rápida, previo a su registro en Migración del Aeropuerto y el cual será a costo de la la persona.
- Dependiendo de los resultados de la prueba rápida se aplicarán las siguientes medidas:
(i) Si el resultado es negativo, la persona estará exenta de cumplir con el aislamiento obligatorio.
(ii) Si el resultado es positivo, la persona pasará a aislamiento obligatorio en un hotel hospital designado por el MINSA.
› En caso de resultado positivo en la prueba rápida realizada en el aeropuerto, se le volverá a realizar a los 7 días una prueba de antígeno para determinar si continúa o no con el aislamiento obligatorio.
› Si el resultado sale nuevamente positivo deberá culminar el aislamiento de 14 días.
› Si el resultado sale negativo terminará su aislamiento.
- Estos requisitos no serán aplicables a (i) las tripulaciones técnicas, (ii) tripulaciones auxiliares, (iii) mecánicos, y (iv) personal humanitario, los cuales deberán cumplir con las demás medidas de bioseguridad establecidas por el MINSA.
- Las medidas sanitarias establecidas por este Decreto estarán vigentes hasta el 31 de diciembre de 2020, sin embargo, las mismas podrán ser prorrogadas.
- Este Decreto entrará a regir a partir del 12 de octubre de 2020.
- Con la reapertura y reactivación de la aviación internacional, a partir del 12 de octubre de 2020, se va a permitir la entrada al país de todos los vuelos internacionales y pasajeros, incluyendo los extranjeros en calidad de de turista.
- A partir del 12 de octubre de 2020 queda derogado (i) el Decreto Ejecutivo 605 del 30 de abril de 2020, mediante el cual se autoriza y regula la entrada y salida de vuelos humanitarios mientras dure el Estado de Emergencia Nacional y (ii) la Resolución No. 766 del 13 de agosto de 2020, mediante la cual se establecieron las medidas sanitarias a los pasajeros que ingresan a la República de Panamá, mientras se mantenga el Estado de Emergencia Nacional.
- Hasta el 11 de octubre de 2020, las personas que ingresen a Panamá deberán presentar a la aerolínea, previo a su abordaje, el Certificado de Prueba de Hisopado/PCR o Antígeno negativo, con un máximo de 96 horas y cumplir con la cuarentena obligatoria y las demás medidas sanitarias establecidas por el por el MINSA.
- Todas las personas deberán cumplir con el Decreto y deberán presentar su prueba negativa de Covid-19 (PCR o Antígeno) 48 horas antes de la De esta manera, podrán ingresar al país sin necesidad de cumplir con el aislamiento obligatorio.
A company’s need for substantial amounts of capital is intensified when looking to grow quickly, or develop an innovative product that will disrupt the market in a meaningful way. This is true to any company, and is especially true to innovative and disruptive startups, which aim at creating new markets, revolutionizing existing ones and prevailing over traditional market participants. To be disruptors, a startups’ product may need to go through testing, the startup may need hire experts in a particular field to assist in the development of a product, or invest heavily to gain scale in the short run and be competitive in a specific market. Thus, raising capital is, without a doubt, a key element in the life of a startup.
Initially, when founders are jumpstarting the company, they will have no other option but to use their own funds. However, as the business grows, and expenses pile up, the founders will need to turn to other methods of financing.
Two mechanisms by which startups may raise capital are (i) equity financing, whereby shares of the company are sold; or (ii) debt financing, in which the company may be required to put its assets as collateral to secure the debt. The latter may not be a viable option for a seed stage startup given that it may not have any assets, or the assets that it has are not an adequate guarantee for the loan. Consequently, convertible debt (which we shall discuss in a subsequent article) or equity financing are typically the most viable routes that startup founders take when looking to finance the operations of the startup. In this new Startup Series’ article, we will summarize the particularities of startup fundraising, the participants, and the terms that a founder should be paying attention to when negotiating with investors in a financing round or series.
After founders have exhausted the seed capital, and require additional funding to keep financing the operations of their company, they will likely look for investments from close friends and relatives. At that moment, funding rounds involving friends and family, which will usually be informal compared to later rounds, will come into play. Because there is a certain level of trust between the investors and founders, the terms of the investment in a friends and family funding round will potentially be much more favorable to the founders, and investors will most likely not ask for special rights and protections such as voting rights over major decisions (or voting rights in general), board seats, or to be involved or actively participate in the management and operation of the company. However, founders must be sure to document every investment from friends and family, and have in writing all rights that are being granted to such investors.
In addition, ideally there will be:
i. A subscription agreement in which, among other things, the startup agrees to issue the shares and the investor agrees to transfer the money; and
ii. An adhesion to the shareholders’ agreement in order for both the investors and the founders to be clear on what are the rules of the game.
Nonetheless, there are certain rights that, due to their long term implications, founders should pay special attention to when thinking about granting them to friends and family investors, such as anti-dilution rights or the right to block subsequent rounds of financing, which might destroy the attractiveness of the startup from an angel investor or a venture capital investor’s perspective. Consulting a lawyer, even at these early stages, would be advisable so that founders may understand the reach of these provisions and will help save time and money down the road.
Next up, are the so-called “angel investors”. These are high net-worth individuals that will invest much more money into the startup than friends and family, will contribute their expertise, and will, occasionally, serve as mentors to the founders. Consequently, angel investors will likely require a certain level of control over management, and will ask for special approval rights over at least certain major decisions of the company, such as the sale of the business or a substantial part of its assets to a third party, or an exit to capital markets (an initial public offering or “IPO”). Although some angel investors may not be very sophisticated, they will often have legal counsel involved to assist them in negotiating better terms in a subscription agreement, or even bargain for convertible notes. Similarly, the founders must make sure to have a lawyer looking out for their best interest during negotiations with an angel investor.
Finally, the venture capital firm or “VC Firm” is where startups get the biggest investments from (if they get to that stage). VC Firms are highly sophisticated and will negotiate intensively to get the best deal possible from their perspective. They will often require the startup and past investors to agree to certain terms in exchange for their investment. For example, a VC Firms will often negotiate for drag-along clauses in which other shareholders of the startup will be required to vote in favor of resolutions that a majority of the shares voted for. This is designed to ensure that minority shareholders will not be able to veto acts that the majority of the shareholders are in favor of.
Typically, these key terms, and others which we discuss below, are negotiated through a term sheet, which will serve as a basis to be used to draft the documents that will be signed in order to formalize the VC Firms’ investment.
Every time a startup founder decides to go through a financing round, he/she must be prepared to negotiate the economic and control aspects contained in the securities or financial instruments being offered. Thus, below we list the most important terms that we consider should be taken into account when a startup is raising capital, regardless of whether it is friends and family, an angel investor or a VC Firm.
1. Investment Type
A founder must decide what securities or financial instruments he or she will give in return for the investment. The investment may be, for example, in exchange for preferred stock with certain liquidation preferences (which we will discuss later); or convertible notes, which act as debt that is convertible into a class of shares when and if a certain condition is fulfilled.
The type of investment is relevant, because it will affect the amount of money that a founder will receive when the company goes through a new round of financing or the company is sold, or taken public through an IPO.
Valuation refers to the value of the startup before (“pre-money”) and after (“post-money”) the investment. This is relevant because it will determine the percentage of the company the founders are selling, and how much they are diluting their participation, after finalizing an equity financing round.
For example, if during a seed series financing round, an investor puts US$ 500,000.00 into a startup with a US$ 2,000,000.00 post-money valuation, that means that the founder is selling 25% of his/her company in exchange for the investment. To determine the valuation of a startup, both the intrinsic data about the business (revenue, number of users, etc.) and the market value of the company (what investors are willing to pay for the company), must be taken into consideration.
NOTE: Take note that the “authorized capital”, as defined by Panamanian law, is not necessarily related to the valuation of the company, and that the nominal value of the shares will not necessarily define the price for which the shares of a Panamanian corporation may be sold.
3. Conversion Rights
Investors in funding rounds will require that they be issued shares which may be preferred and with a right to convert to common shares at any time. This may mean that if an investor is unhappy with the way a company is being run and decides to exercise it conversion rights, the investor will gain voting rights, which may lead to additional control over the company, and, in that case, there will be a risk that a founder is ousted a director or officer. To deter investors from converting their preferred shared into common shares before a liquidity event (usually defined as a sale of the company or a substantial part of its assets and/or stares) takes place, founders will typically offer liquidation preferences and participation rights (discussed in “4” and “5” below).
4. Liquidation Preferences
A liquidation preference is a very important and highly negotiated economic term in a funding round. The liquidation preference refers to the amount of money that the holder of a particular class or series of shares has the right to when and if the startup goes through a liquidity event.
Typically, an investor in a funding round will negotiate for a liquidation preference in the shares he/she is acquiring, in order to receive a certain amount of money per share if a liquidity event takes place. A common liquidation preference clause will say that the investor has the right to receive a per share amount of “X times the original purchase price of the shares, plus declared but unpaid dividends”. It is important to keep in mind that the liquidation preference, as its name indicates, gives the investor preference over the other classes or series of shares, thus, the investor that holds the liquidation preference gets paid before other classes or series of shares. A liquidation preference below “1x” would not make much sense, given that the investor would want to, at the least, recover his/her investment. However, investors may negotiate for a higher multiple (i.e. 1.5x, 2x, 3x and so on).
5. Participation Rights
In addition to a liquidation preference, startups may need to offer participation rights in order to make the investment more attractive (depending on the stage they are in and the successfulness of their business model). Participation rights are usually paired up with liquidation preferences, and the investor will have both if a liquidity event takes place.
During a liquidity event, a holder of shares with a liquidation preference and participation rights will have the right to receive payment for its shares before the holders of other classes or series of shares, and participate in the sale of the company as if its preferred shares had been converted into common shares. This combination of liquidation preference and participation rights is designed to ensure that the investor will at the least get back its investment (in the event that the company is sold for a price below the investor’s purchase price), or participate in the sale of the common shares and get a “premium” for assuming the risk at the time he/she made his/her investment (in the event the sale is over the investor’s purchase price).
Example A: Imagine that Investor A invests $20,000.00 for 20% of Startup S.A. in a seed series round (US$ 100,000.00 post-money valuation). In exchange for the investment, Investor A receives preferred shares with “1x” liquidation rights and participation rights. Thereafter, Startup S.A. is sold for US$ 1,000,000.00. If Investor A only had a liquidation preference, it will only get its initial US$ 20,000.00 investment back. On the other hand, if Investor A has a liquidation preference plus the right to participate in the sale, it will receive the initial US$ 20,000.00 investment back, and the participation rights will entitle Investor A to an additional US$200,000.00 (20% of US$1,000,000.00), as if the preferred shares had been converted.
If the situation is the opposite (Startup S.A. is sold for less than US$ 100,000.00), a liquidation preference guarantees that the investor will at least get back its initial investment.
Keep in mind that, as mention in section “3” above, investors will negotiate for preferred shares with the right to convert to common shares. Liquidation rights deter the conversion of the shares, because if the investor converts, then it loses its preference, and will only be able to participate in the sale of the company. The risk is that the company sells for a lower price than the investor’s purchase price and the investor loses its investment.
6. Composition of the Board of Directors
As one of the most important control aspects of a negotiation, an investor in a funding round will typically require the right to appoint at least one director to the board of directors in exchange for its investment. This guarantees that the investor will be represented in the board of directors and that the investor will be able to vote in board meetings, thus have control over the decision-making of the business.
7. Protective Provisions
Investors will negotiate for veto powers over certain major decisions of the company. Friends and family, and angel investors will seldom negotiate for veto powers. VC Firms on the other side, will require veto powers over, for example, mergers/change of control, incurring debt for over a certain amount, declaring dividends, and increases or decreases of authorized capital of the company, among others.
Founders will need to decide what type of major decisions they want to give investors control over. The important aspect here is that founders make sure that the same protective provisions are granted to investors of the various financing rounds. If different classes have different veto powers over major decisions, making decisions will be difficult and time consuming.
This is a term that a founder must be clear when entering negotiations with a potential investor. Generally, antidilution clauses will determine which shareholders get diluted when a new financing round takes place, and how much those shareholders will be diluted. This is relevant because, if not well defined, a founder may lose control of his/her company by diluting too much of his/her percentage in the company.
Keep in mind that each business and its financial needs must be evaluated taking into account their particular situations (amounts being raised, number of investors and shareholders, among others), so as to determine what economic and control terms deserve the most attention. We are at your service for any queries you may have on these issues.
For more information on these topics, please contact:
MORGAN & MORGAN
Tel: 265-7777 ext. 7783
Email: [email protected]
|Miguel Arias M.
MORGAN & MORGAN
Tel: 507-265-7777 ext. 7687
E-mail: [email protected]