Understanding Funding and Financing through the CVCA – Part 4: The Shareholders’ Agreements, Shaping the Post-Financing Landscape
Welcome back to our exploration of the Canadian Venture Capital & Private Equity Association (CVCA) model documents. In previous installments, we covered how founders and investors set the high-level terms of the transaction through the Term Sheet and how lawyers then set out the specific terms for the purchase of equity in the Subscription Agreement – this week, we focus on the three crucial agreements that shape the post-financing landscape: the Voting Agreement, the Right of First Refusal and Co-Sale Agreement and the Investors' Rights Agreement. While the Subscription Agreement sets the foundation for the transaction, these agreements determine the future governance, rights, and obligations of a company and its shareholders.
Voting Agreement
At the heart of corporate governance lies the Voting Agreement. As you can guess from its name, this document outlines how shareholders will vote on key matters affecting the company thereby solidifying the decision-making processes. Typically, it addresses issues such as board composition, major corporate transactions, and significant operational decisions that could substantially alter the company’s direction. The Voting Agreement not only describes the voting commitments among shareholders, but it also formalizes them by providing certain individuals a power of attorney to vote the shares of other shareholders and align them with the majority. This arrangement ensures that during crucial votes, shareholder actions are coordinated, reflecting a unified approach. Furthermore, it ensures key decisions reflect the shared vision and strategic direction of the overall company.
Right of First Refusal and Co-Sale Agreement
In the dynamic world of venture capital, exit opportunities and share sales can be common occurrences. The Right of First Refusal and Co-Sale Agreement plays a crucial role in governing these transactions, providing the company and existing shareholders with certain rights and protections aimed at maintaining the ownership structure. The Right of First Refusal allows designated shareholders the opportunity and priority to purchase shares before they are offered to external parties, thus preserving the ownership structure and preventing unwanted dilution. Simultaneously, the Right of Co-Sale allows eligible shareholders to participate in the sale of shares initiated by other shareholders, ensuring parity and maintaining the balance of power within the shareholder base. Together, these provisions promote fairness and transparency in share transfers, safeguarding the interests of all parties involved and ensuring the ownership of the company is well monitored.
Investors' Rights Agreement
Investors don’t just seek shares in exchange for their capital, they also demand assurances and protections to safeguard their investment. The Investors' Rights Agreement addresses these concerns by delineating the rights and privileges afforded to investors in relation to the company. This may include provisions granting investors access to financial information, representation on the board, and veto rights over certain decisions that could significantly impact the company’s trajectory. Additionally, the agreement may set out the process for future financings, pre-emptive rights allowing investors to participate in subsequent funding rounds, and anti-dilution protections designed to preserve investors' equity stakes. By formalizing these rights, the Investors' Rights Agreement fosters transparency, trust, and collaboration between investors and founders, thereby laying the groundwork for a successful partnership in the long-term.
Navigating the Post-Financing Landscape
As companies transition from the financing stage to operational growth, the Voting Agreement, the Right of First Refusal and Co-Sale Agreement and the Investors' Rights Agreement become instrumental in shaping governance structures, protecting shareholder interests, and fostering investor-founder alignment. These agreements serve as comprehensive guides for navigating the post-financing landscape. By establishing clear rules and expectations, these documents help all parties focus on the primary goal of growing the company, while simultaneously safeguarding the interests and maintaining the trust of investors through transparent and equitable practices.
Stay tuned for next week where we continue our exploration on the CVCA Model Documents!
