Growth Capital: the path to achieving scale
Allen & Overy is an engaged and active player in the growth company ecosystem. Our depth of experience in acting for scaling companies and their investors enables us to get to the heart of what is important for each business and its backers when providing growth capital.
This can be a challenge. Growth companies have proved they can get a venture off the ground, but as they scale they need to prove that they can consistently generate repeat business, gain real traction with their customers and survive in an environment where greater scrutiny from regulators, investors and competitors is the norm. We understand the complex framework of legal and business issues that need to be navigated to ensure all these factors come together successfully. We help companies secure investment, put in place strong and commercial risk management practices, protect and exploit their intellectual property, expand internationally and manage their growing pool of talent.
We also regularly advise investors on key areas of focus when backing high growth companies. At A&O we understand investors and have detailed knowledge of the investment process. We advise the full life cycle of investment activity from initial investments and follow-on funding rounds through to exits via trade sales or IPOs. We also advise a wide range of institutional investors on their investments (including minority investments) and their portfolio companies on ongoing operational matters.
We know that these transactions are often undertaken on truncated timetables and we are known for being able to field multidisciplinary teams which are focused on achieving the right result for our clients as efficiently as possible. The scale of our global network allows us to anticipate potential legal and regulatory challenges associated with the global expansion plans of growth companies and move fast to secure competitive advantage.
Our lawyers are experts in working with our clients to produce consistent and risk conscious results while preserving and encouraging the innovation, creativity and agility that these transactions promise.
Life cycle of a growth company
Initial and Founding Capital
Early stage funding rounds, typically for the purposes of kick-starting R&D. Funds may be initially raised by the founders, who will take major stakes in the company, followed by subsequent minor and low value investments by friends, family and employees. Further seed investment is often obtained from ‘angel investors’, whose contributions may be in exchange for convertible debt or equity shares.
- Investment documentation at this stage is typically light
- May comprise shareholders’ agreement, short form subscription agreement (with limited or no warranties) and model constitutional documents with no bespoke investor protections
Venture capital funds (VC Funds) typically invest in companies once they are trading. This investment is often the company’s ‘A round’. It is common for companies to be unprofitable at this stage and venture capital financing may be used to counter any negative cash flow. VC Funds will generally make larger investments than any existing investors to date and will require a material equity stake in return.
- VC Funds will expect transaction documentation to be redrafted at this stage to provide specific investor protections
- Company and founders will be expected to enter into a long form subscription and shareholders’ agreement (with a broader package of warranties)
- Constitutional documents will contain preferential rights for Series A investors, such as liquidation preferences and anti-dilution provisions
Series B and Beyond
Subsequent Series B, C, D investment rounds etc. may follow to enable the company to scale its business. Other types of investors, such as private equity funds, hedge funds and certain strategic investors may join the VC Funds in these subsequent rounds. The size of the investments will increase as the value of the company grows.
- Transaction documents are typically based on those used for previous funding rounds
- Amendments may include additional investor rights, protections and/or warranties as required
- As the company nears the exit stage for investors, there will be increased focus on whether liquidation preferences and pre-IPO reorganisation mechanics operate effectively
Institutional investors participate in funding rounds with a view to exiting the company within an agreed period of time. This is usually achieved by way of an IPO or M&A transaction. During this final phase the company may look for bridging/ pre-IPO funding to finance its continued expansion and/or exit strategy.
- Liquidation preferences will be triggered on either exit route, which may include bonus share allotments by the company
- Pre-IPO reorganisation steps may be required to collapse various share classes into one single class that will be admitted to trading – shareholders will need to pass resolutions and take other steps to facilitate the IPO, which may require coordination
- The company will appoint one or more investment banks to assist with the exit – generally the expenses will be borne by the company