Handbook of venture capital documentation MIRTA Partners Deliverable Thessaloniki Technology Park Deliverable Number: D.3.1.1 Management & Development Yiannis Bakouros email@example.com Instituto Andaluz de Tecnologia Date: August 2001 María Fernández García firstname.lastname@example.org Version: 0.1 University of Rome, Tor Vergata Maurizio Ferri (Project Co-ordinator) email@example.com Deliverable Author TechMaPP, The University of Edinburgh TechMaPP with support and Tony Kinder assistance from Hayward & Co. (firstname.lastname@example.org) ** (0) 131 650 2451 Contract Number MIRTA is an EU Funded Project Handbook of Venture Capital Documentation Page 2 Project MIRTA Migrating Innovation and Research through Alliance Handbook of venture capital documentation Abstract The MIRTA project aims to build competences and capacity for biotechnology company start-ups in Sevilla, Rome and Thessoloniki by transferring and adapting best practices from Scotland. This deliverable is a handbook of documentation typically used in Scottish venture capital processes. Documentation ranges from fund marketing and initial filtering, through investment stages to investment monitoring. The handbook has the practical purpose of assisting the building of finance and innovation constituencies in the target areas. Handbook of Venture Capital Documentation Page 3 Handbook of venture capital documentation Executive summary Handbook of Venture Capital Documentation Page 4 Page S Content e c t i o n Handbook of Venture Capital Documentation Page 5 1 INTRODUCTION TO HANDBOOK According to an OECD survey, the European biotechnology industry (1999 figures) contains 1,036 companies, employing 39,000 people with an annual turnover of some EUR 3.1 billion with a R&D capital expenditure of some EUR 2.2 billion. This constitutes roughly a quarter of the global biotechnology industry.1 In another recent survey the OECD finds little evidence of biotechnology employment or firms in Spain, Greece and Italy.2 The vision of Project MIRTA is to help address this imbalance in a this growing industry. In particular, the project aims to help transfer expertise and good practice from the successful Scottish region to the embryonic biotechnology constituencies in Rome, Seville and Thessoloniki. The focus of this report is upon venture capital expertise. Venture capital is alternatively known as risk capital or private equity. This section outlines the purpose of the handbook, its use and following a summary of a typical venture capital investment process, a list of documents featured in the handbook. The section also contains a brief list of Internet and physical sources of further information on venture capital processes. 1.1 Introduction and purpose of this handbook The MIRTA project aims to build competences and capacity for biotechnology company start-ups in Sevilla, Rome and Thessoloniki by transferring and adapting best practices from Scotland. This deliverable is a handbook of documentation typically used in Scottish venture capital processes. Documentation ranges from fund marketing and initial filtering, through investment stages to investment monitoring. The handbook as the practical purpose of assisting the building of finance and innovation constituencies in the target areas. Adapted documents may be translated and used in deals in the target regions following consideration on their relevance within the local fiscal, legal and business regimes. To assist this process, the deliverable is available in both digital and paper format. This handbook is the result of co-operation between TechMaPP at the University of Edinburgh and Jeremy Hayward of Hayward and Co Ltd in Scotland. Hayward & Co is an SME expert in venture 1 OECD, 1999, Modern Biotechnology and the OECD, Policy Brief, Paris, available at http://www.oecd.org/publications/pol_brief/1999/9903-eng.pdf 2 See http://www.olis.oecd.org/olis/2000doc.nsf/c5ce8ffa41835d64c125685d005300b0/c1256 92700623b74c12569540035a297/$FILE/00082325.PDF Handbook of Venture Capital Documentation Page 6 capital investments. This major piece of work is only made possible by the cumulation of knowledge and expertise by Hayward & Co over decades of successful investment in innovative SMEs.3 1.2 A typical venture capital process Venture capital is long-term, committed share capital invested in early stage, entrepreneurial companies helping them to grow and succeed and the investor to make a return commensurate with the risk taken. Since venture capital expects the high returns associated with high risks, it is appropriate only to companies aiming for high growth and profitability and often, therefore, associated with technological innovative companies. Particular venture funds are likely to reduce risks by specialising in a particular sector (spatial, size of investment, stage of investment or sector). This is to the advantage of investee companies, since the VC is then able to offer practical support in addition to capital. For the purposes of this report, to illustrate a typical venture capital (VC) investment process, these processes decompose into four phases (shown below). The process described here relates to investments by a constituted fund. Equity investments by (for example) angel funders are likely to take a different form. The business of investment – the marketing of venture capital availability and the early filtration of business plan submissions. From enquiry to investment – the evaluation of business plans, diligence, negotiation, syndication, structuring and completion of a deal, including projected returns and exit route. Monitoring investment – the monitoring of investment performance by the VC and their appointed advisors or non- executive directors. Exit and Fund reports – the negotiation of VC exit (often by buy-back of equity or trade sale of the company) and the reporting by the VC of the funds performance to its stakeholder. 3 Hayward and Co is one of the most reputable firms in the areas of venture capital, fund raising and financial structuring in Scotland. Jeremy Hayward is a chartered accountant with thirty years continuous experience in the venture capital industry including fifteen years with 3i, latterly in charge of their Edinburgh office. Investment Adviser and non executive director of Lothian Enterprise Board. Jeremy has acted as independent chairman or director of a number of public and private limited companies. At the beginning of 1997, Jeremy was appointed Director of Corporate Finance for Ernst & Young in Scotland. With thirty years experience in venture capital investment, Jeremy Hayward has a wide knowledge of structuring and raising finance. Handbook of Venture Capital Documentation Page 7 The focus of the current report is from the viewpoint of the investor – the venture capitalist and particularly the documentation covering the „enquiry to investment‟ phase of operations. For a fuller description of the VC investment process see the British Venture Capital Association‟s “A Guide to Venture Capital.4 The practical documentation contained in this handbook are structured using the four phases of VC investment listed above. The figure below lists the 42 venture capital documents forming the main content of this report. Their order roughly corresponds to the stage in the investment process in which they are used and structure the main text of this report. 4 Available at http://www.bvca.co.uk/publications/guide/guide.pdf Handbook of Venture Capital Documentation Page 8 Document number Document title 1 Standard Confidentiality letter 2 Non-disclosure agreement 3 Business plan summary 4 Enquiry sheet 5 Enquiry log 6 Terms and conditions 7 Investment submission 8 IRR calculation 9 Outline Terms and Heads of Agreement 10 Formal Offer letter 11 Reference document seeking diligence on management team 12 Enquiries for Directors 13 Engagement letter 14 Financial forecast 15 Marketing diligence proposal 16 Marketing diligence report 17 Service Agreement 18 Salary Schedule 19 Employee Handbook 20 Licensing Agreement 21 Investment Agreement 22 Articles of Association 23 Easy Loan Agreement 24 Fast Track Loan 25 Floating Charge 26 Ranking Agreement 27 Option Agreement 28 Conditional Option Notice 29 Shareholder‟s Undertaking 30 Personal Guarantee 31 Share Capital Certificate 32 Disclosure Letter 33 Investment Record 34 Appointment letter 35 Standing Order 36 Exception Report (blank) 37 Exception Report (example) 38 Exit proposal 39 Independent non-executive Directors 40 Preparing a business plan 41 Raising venture capital 42 Equity instruments and deal structuring Careful reading of these 40 documents will show that they originate from small and large deals. They include simple (number 26) easy loan agreements and complex multiple-syndicator equity deals. Most of these documents are general purpose and relate equally to the biotechnology and other sectors. No IPO (initial public offer) documents are included, since the processes are quite specific to each country. Handbook of Venture Capital Documentation Page 9 1.3 Handbook use: IPR and copyright The materials contained in this handbook are to the best of the knowledge of the authors not subject to copyright, license or restricted use. Since most of these materials are found in general use, they form background intellectual property. Material contained in this report are subject to the provisions for materials contained in EU-funded projects.5 It is the clear advice of the authors that prior to making use of the materials contained in this report for any business or associated purpose, that user firstly consult with an appropriately qualified professional advisor. For assistance and clarification on intellectual property see the CORDIS helpdesk at http://www.cordis.lu/inco2/src/ipr.htm. In addition, The Internet Engineering Task Force website contains useful material at http://www.ietf.org/ipr.html. Any enquiry relating to intellectual property should be addressed initially to the Project Co-ordinator.6 The MIRTA project, its partners and funders disclaim any responsibility for the use of material contained in this report. No representations or warranties, express or implied, including, but not limited to, warranties of merchantability, fitness for a particular purpose, title or non-infringement are intended. Additionally, the MIRTA project, its partners and funders make no representation or warranty that the contents of this report are free from error or suitable for any purpose nor that implementation of such contents will not infringe any third party patents, copyrights, trademarks or other rights. In no event will MIRTA project, its partners and funders be liable to any party for any direct, indirect, special or consequential damages for any use of this material. 1.4 A note on regulatory and fiscal regimes Venture capital is more developed as an instrument of investment in some parts of Europe than others. Necessarily, therefore, despite recent harmonisation in tax regimes and company law, 5 CEC, 1999, An Introduction to Industrial Property Rights Under the Model Contract, OPEC, Luxembourg (ISBN 92-828-3581-2). 6 For a general assessment of biotechnology IPR see OECE, 1996, Intellectual Property, Technology Transfer and Genetic Resources: An OECD Survey, ISBN 92-64-14869-8. Handbook of Venture Capital Documentation Page 10 important differences remain between member states. Since venture capital investments are highly sensitive to legal and fiscal regimes it is important to note that there are underlying presumptions contained in UK law inherent in some of these documents. It is important therefore that professional advice is taken prior to investment on the particular tax and legal regimes in which an investment is to occur. Examples of important differences between member states are in the relationship between corporation tax and local taxes, the offsetting of tax losses and relief within a corporate fiscal unity, treatment of goodwill amortisation, the tax treatment of capital gains by non-residents, prohibitions on senior debt incurred during acquisition, limitations on the use mezzanine debt or high yield bonds and variations in the classes of equity (particular preference and subordinated loan structures. In each member state‟s state budget cycle it is likely that important changes in the fiscal and legal regime affecting venture capital will occur on an annual basis. This reinforces the point that prior to any investment commitment, investors must take professional advice. 1.5 Information on venture capital processes Like most professions, venture capital investment is a mixture of formal learning and tacit learning. Skills, judgement and luck are important. Since web-based information is often easiest a number of useful sites are listed below. The addresses lists are English language addresses (the working language of the MIRTA project), however, many of these sites have multilingual capacity. This list is intended to give a flavour of web-based information available and is by no means exhaustive. http://www.vfinance.com/home.asp?ToolPage=vcim_detail.asp&id=3218 Commission sites http://www.cordis.lu/finance/home.html http://www.cordis.lu/eims/src/eims-r43.htm http://www.cordis.lu/itt/itt Venture capital network sites http://www.bvca.co.uk http://www.evca.com (this site give links to groups in all Member States) Handbook of Venture Capital Documentation Page 11 Major venture fund sites and other relevant sites http://www.3i.com/stories/99am.htm http://www.3i.com/market/euro.htm http://www.3igroup.com http://www.eco.rug.nl/bib/ee_med.html http://netec.mcc.ac.uk/WoPEc/data/PaperSeries.html http://www.bryant.edu/~pnorton/resources/links.html http://www.hiid.harvard.edu/research/newnote.html http://www.stanford.edu/~chadj/growth.html http://rfe.wustl.edu/EconFAQ.html http://www.vfinance.com http://invest.8m.com http://www.betacom.it/aifi/euro.htm http://www.4venturecapital.com http://www.Bplans.com http://www.hbsp.harvard.edu/ideasatwork/entrep/business/ More specifically on venture capital investment in biotechnology sector, the following sites contain useful information, as do many of the sites listed above. Again, this list is by no means exhaustive. Many of these sites (such as Scottish Enterprise) offer a newsletter subscription facility. http://www.scottish-enterprise.com http://www.sebiotech.org.uk http://www.bio.com http://www.iza.org/index.html http://www.bio.com http://fbox.vt.edu:10021/cals/cses/chagedor/Extnbull.html http://www.biotechknowledge.com http://www.cpb.dtu.dk http://www.academicinfo.net/biotech.html http://www.biowise.org.uk/html/enter.html http://www.4biotech.com http://www.biowise.org.uk/html/enter.html http://www.ebi.ac.uk http://www.cato.com/biotech http://www.elsevier.com:80/homepage/sah/biotech/search/search_fr .htm http://www.abdn.ac.uk/~mmb023/proteome/index.htm http://www.dti.gov.uk/bioguide/uni.htm http://www.startuponline.com http://www.planwizard.com http://GMWORLD.NEWSCIENTIST.COM http://www.rdmag.com/index.htm Handbook of Venture Capital Documentation Page 12 At http://advocacy-net.com/venturemks.htm lists 1,000 sites listed giving information on venture capital. 1.6 Handbook use: Nomenclature and technical terms The documentation contained in this report is from the viewpoint of the venture capitalist. Also, this documentation is taken from actual investments and therefore there is a need to protect commercial confidentiality. Therefore, the report uses the following nomenclature. Investor Co The VC making the investment New Co The newly created company resulting from the investment Old Co Old company(s) the target of the New Co investment Bank Co The banking partner of the VC Solicitor Co The solicitor of the VC Syndicator Co Syndicating investors alongside the VC The figures mentioned in some of the documents should be interpreted as illustrative. In all cases, the figures were accurate in a particular context. However, contexts vary as will the figures. Additionally, figures mentioned were originally in sterling (GB Pounds) and have been simply transferred in Euro (EUR) amounts. There are many web-based resources giving glossaries of VC terms, including those at the BVCA and EVCA (above). A useful magazine on VC trends and deals is “Red Herring,” which has a web resource (http://www.fundingedge.com/glossary.htm) giving various glossaries of VC terms. Handbook of Venture Capital Documentation Page 13 VENTURE CAPITAL DOCUMENTATION – FROM ENQUIRY TO INVESTMENT Document Number 1 Document title Standard Confidentiality Letter Purpose of document To ensure confidentiality between potential syndicators Example of use This is a standard letter Key sensitivities In a mature VC environment such a letter formally establishes working practices based upon trust. Few funds would receive enquiries if it became known that they could not respect confidences. To: [Potential Investor] Dear Sirs We understand that you wish to investigate the business of [name of company] (the "Company") [and of its subsidiaries] (together the "Group") [in connection with [insert nature of transaction] (the "Permitted Purpose")] and that you, your directors and employees, other potential syndicate members or other providers of finance and your financial and professional advisers in relation to the Permitted Purpose, (together referred to as the "Disclosees"), will need access to certain information relating to the Group (the "Confidential Information") [including, without limitation: ....]. 1. In consideration of our agreeing to supply, and so supplying, the Confidential Information to you and agreeing to enter into discussions with you, you hereby undertake and agree as follows:- (a) to hold the Confidential Information in confidence and not to disclose or permit it to be made available to any person, firm or company (except to other Disclosees), without our prior [written] consent; (b) only to use the Confidential Information for the Permitted Purpose [provided that on being notified by us that the proposals concerning the Permitted Purpose have lapsed, you may approach the Company [or its advisers] with separate proposals and we acknowledge that in so doing you may have regard to the Confidential Information provided]; (c) to ensure that each person to whom disclosure of Confidential Information is made by you is fully aware in advance of your obligation under this letter and that, in the case of other potential syndicate members, each such person gives an undertaking in respect of the Confidential Information, in the terms of this letter; Handbook of Venture Capital Documentation Page 14 (d) upon written demand from us either to return the Confidential Information and any copies of it or to confirm to us in writing that, save as required by law or regulation, it has been destroyed. You shall not be required to return reports, notes or other material prepared by you or other Disclosees or on your or their behalf which incorporate Confidential Information ("Secondary Information") provided that the Secondary Information is kept confidential; (e) to keep confidential and not reveal to any person, firm or company (other than Disclosees) the fact of your investigations into the Group or that discussions or negotiations are taking place or have taken place between us in connection with the proposed transaction or that potential investors/acquirers are being sought for the Company: (f) that no person gives any warranty or makes any representation as to the accuracy or otherwise of the Confidential Information, save as may subsequently be agreed. 2. Nothing in paragraph 1(a) to (f) of this letter shall apply to any information or Confidential Information: (a) which at the time of its disclosure is in the public domain; (b) which after disclosure comes into the public domain for any reason except your failure, or failure on the part of any Disclosee, to comply with the terms of this letter; (c) which is disclosed by us or the Company, its directors, employees or advisers on a non-confidential basis; (d) which was lawfully in your possession prior to such disclosure; (e) which is subsequently received by you from a third party without obligations of confidentiality (and, for the avoidance of doubt, you shall not be required to enquire whether there is a duty of confidentiality); or (f) which you or a Disclosee are required to disclose, retain or maintain by law or any regulatory or government authority. Handbook of Venture Capital Documentation Page 15 3. In consideration of the undertakings given by you in this letter, we undertake and agree: (a) to disclose Confidential Information to you; (b) to keep confidential and not to reveal to any person, firm or company (other than persons within our group who need to know, our bankers and professional advisers) the fact of your investigation into the Group or that discussions or negotiations are taking place or have taken place between us; (and (c) that we will not prior to [insert date], directly or indirectly enter into negotiations or have discussions of any kind with any other potential investors which relate to the Permitted Purpose without your prior written consent and we recognise that in reliance on this undertaking you and other Disclosees may incur substantial costs.) (This relates to exclusivity and is a matter for negotiation). 4. (a) This letter shall be governed by and construed in accordance with English law [and the parties irrevocably submit to the non-exclusive jurisdiction of the Courts of England and Wales in respect of any claim, dispute or difference arising out of or in connection with this letter.] (b) The obligations in this letter will terminate on [insert expiry date]. Please indicate your acceptance of the above by signing and returning the enclosed copy of this letter as soon as possible. Yours faithfully On copy: We have read and agree to the terms of the above letter. Signed by ) for and on behalf of ) ) Handbook of Venture Capital Documentation Page 16 LIMITED ) Date: [......................] Handbook of Venture Capital Documentation Page 17 Document Number 2 Document title Non-disclosure Agreement (NDA) Purpose of document To protect the investor from disclosure of commercially confidential information. This enables information exchange without the investor becoming embroiled in a „bidding war‟ whilst protecting the business ideas of the investee. Example of use This example is detailed. More detailed NDAs may specify particular intellectual properties. Key sensitivities An NDA may be the beginning of mutual trust and inter-dependency. Non Disclosure Agreement As between (name) trading as New Co (“New Co”) and __________________ (“___________________”) having a principal place of business at (place) __________________________, both parties agree that disclosed Confidential Information, as defined below, provided by the disclosing Party, (as "Owner"), to the receiving Party, (as "Recipient"), for the purpose stated, shall be treated in accordance with the following provisions: 1. “Confidential Information”: shall mean any information obtained for the purpose stated below, whether disclosed orally or in writing, or through observation, examination or use, specifically: INFORMATION DISCLOSED BY ___________________: regarding other companies with which it has business relationships. INFORMATION DISCLOSED BY New Co: regarding the planned operation of New Co‟s business, including business plans, financial data and financial forecasts, technology infrastructure, and customer information. FOR PURPOSES OF: raising equity capital in New Co 2. “Disclosing Period”: This NDA governs only that Confidential Information disclosed by Owner to Recipient during the Disclosing Period: _________ (DD/MM/YY) to _____________ (DD/MM/YY). 3. Continuing Obligation: After the Disclosing Period, Recipient has a continuing obligation to maintain the confidentiality of Handbook of Venture Capital Documentation Page 18 Owner‟s disclosed Confidential Information for a period of five (5) years. 4. Other Sources Exemptions: Recipient‟s obligations hereunder will not apply, or shall cease to apply, to that Confidential Information which Recipient can establish: (i) was not identified as required by Section 5 of this Agreement; or (ii) was in the public domain by acts not attributable to Recipient or otherwise available to the public other than by breach of this NDA; or (iii) was rightfully in possession of Recipient prior to receiving it from Owner; or (iv) becomes available to Recipient from a source other than Owner who is in rightful possession with the lawful right to provide it to Recipient; or (v) is independently developed by Recipient without use of or reference to the Confidential Information; or (vi) is otherwise agreed in writing to be no longer considered otherwise restricted by Owner. 5. Limitations on Duty: Recipient‟s duty to maintain the confidentiality extends only to that disclosed Information which: (i) is identified as being Confidential at the time of disclosure by Owner; or (ii) if disclosed in tangible form is marked Confidential, or with a similar legend, at the time of disclosure; or (iii) if disclosed orally, or if inadvertently not identified as Confidential at the time of disclosure, is summarised and syndicator as Confidential by Owner in a written memorandum delivered to Recipient within thirty (30) days after the disclosure. 6. Standard of Care: Recipient shall protect the disclosed Confidential Information by using the same degree of care, but no less than a reasonable degree of care, as it uses to safeguard its own confidential or proprietary information of a like nature from unauthorised use, disclosure, or dissemination. Recipient shall not copy, distribute, or disseminate any of the Confidential Information to any unauthorised persons or entities without the Owner's express prior written consent and Recipient shall limit access to the Confidential Information to only those authorised employees or agents having a need to know. 7. Return of Materials: Upon the earlier of fifteen (15) calendar days after: (i) Recipient's receipt of Owner's written request for same, or (ii) Recipient's completion of those stated purposes for which Owner provided Recipient its Confidential Information; or (iii) the end of the Disclosing Period; all of Owner's Confidential Information and all copies thereof in Recipient‟s possession or control shall be returned to Owner or Handbook of Venture Capital Documentation Page 19 destroyed by Recipient at Owner's instruction. At Owner‟s request, Recipient shall then certify the same in writing and that no copies have been retained by Recipient, its employees or agents. 8. Mandatory Disclosure Exemptions: Nothing herein shall restrict Recipient's right to disclose the Confidential Information where such disclosure is required by written order of a judicial, legislative, or administrative authority of competent jurisdiction, or is necessary to establish its rights under this Agreement, provided, however that, in each case, Recipient will first notify Owner of such need or requirement and co-operate with Owner in limiting the scope of the proposed disclosure. Recipient will assist Owner in taking all reasonable steps for obtaining further appropriate means of limiting the scope of the required disclosure of Owner‟s Confidential Information. 9. Freedom for Independent Development: Nothing in this Agreement shall be construed to limit Recipient‟s right to independently develop information, materials, technology, or other products or services for itself or for others which may compete with Owner so long as no unauthorised disclosures or use has been made by Recipient during the term of obligation, as defined in Section 3 herein. Further, nothing herein shall be construed as a representation or inference by Recipient that it has not already developed, or may be in the process of developing, or may have already rightfully received or acquired from third parties, information similar to that Confidential Information to be disclosed by Owner. 10. Equitable Relief Availability: Recipient acknowledges that an unauthorised disclosure of the Confidential Information may cause irreparable harm to Owner for which no adequate remedy at law exists and that, in addition to any other remedies which may be available, Owner shall be entitled to seek injunctive relief to enforce the terms of this NDA. 11. No Rights or Licenses Extended: No rights or licenses whatsoever, either express or implied, are granted hereunder by one to the other as to any patents or patent applications, copyrights, trade marks, trade secrets, or other intellectual property now or hereafter acquired, developed, or controlled. Owner retains all rights and remedies afforded under all U.S. and foreign patent, copyright, trade secret, and other Handbook of Venture Capital Documentation Page 20 applicable laws for protecting confidential, proprietary, or trade secret information. 12. No Waiver of Rights: If one Party breaches this Agreement then the failure of the other Party to enforce any rights under this NDA shall not be deemed a waiver of any such rights. The rights and remedies of the parties, as set forth in this agreement, are not exclusive and are in addition to any other rights and remedies provided by law. Additionally, the invalidity in whole or in part or condition of this Agreement shall not affect the validity of any other part or condition. 13. Transfer Restrictions: Recipient will not transfer any disclosed information received hereunder to any country prohibited from obtaining such data according to any national export regulation, (e.g., UK Department of Trade and Industry Regulations), without first obtaining all valid export licenses and authorisations. 14. WITH RESPECT TO THE CONFIDENTIAL INFORMATION DISCLOSED, OWNER PROVIDES INFORMATION “AS IS” AND MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO RECIPIENT AS TO ITS CONDITION, MERCHANTABILITY, OPERATION, OR FITNESS FOR A PARTICULAR PURPOSE OR USE. OWNER FURTHER WARRANTS THAT IT HAS THE RIGHT TO DISCLOSE THE CONFIDENTIAL INFORMATION TO RECIPIENT AND THEREFORE HAS GRANTED RECIPIENT LAWFUL ACCESS TO THE CONFIDENTIAL INFORMATION FOR THE LIMITED PURPOSES SO STATED. 15. No Relationship Established: It is understood that both parties do not intend that any agency or partnership relationship be created between them by this NDA. Neither party has any further obligation hereunder to transact any business whatsoever with the other party. 16. Written Modifications: All modifications to this Agreement must be made in writing and must be signed by both parties. 17. Governing Law: This Agreement is made under and shall be construed according to the laws of Scotland. 18. Acceptance by New Co: This Agreement becomes binding upon New Co when signed by an Officer thereof. 19. Entire Understanding: This Agreement sets forth the entire understanding between the parties and supersedes all prior discussions between them regarding the exchange of Confidential Information, as defined. Handbook of Venture Capital Documentation Page 21 IN WITNESS WHEREOF, the parties have entered into this agreement as of the last date set forth below. FOR: New Co By: __________________________________ Name: (name) Title: Managing Director Date: ________________________________ FOR: Investor Co By: _________________________________ Name: _______________________________ Title: ________________________________ Date: ________________________________ Handbook of Venture Capital Documentation Page 22 Document Number 3 Document title Business Plan Summary Purpose of document To offer entrepreneurs who have not yet created a business plan a way of applying for finance without incurring the time/cost of preparing a full business plan. Example of use The document aims to offer a simplified yet disciplined way for the entrepreneur to lay out their business idea – its costs, risks and possible returns. Key sensitivities It may be the worst business plan still contains ideas which if properly managed can become highly profitable. Investor Co Ltd Business Plan Summary COMPANY DETAILS & BACKGROUND Company Name ................................................. Telephone ........................................ Address ................................................. Fax ........................................ ................................................. E-mail ........................................ ................................................. Contact Name ........................................ ................................................. Position ……………………………. Post Code ................................................. Nature of Business ................................................................ ........................................................ Legal Status (i.e. Ltd) ................ Date Commenced Trading ............. Subsidiary of another Co Yes No Handbook of Venture Capital Documentation Page 23 Where did you learn of Investor Co? …………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………………………... BUSINESS ACTIVITY COMPETITIVE ADVANTAGE / MARKET OPPORTUNITY (indicate any registerable IPR) STAGE OF DEVELOPMENT / TIME TO MARKET / KEY MILESTONES (dates) MANAGEMENT TEAM (Directors and Senior Managers) Name Position Years Age % Share £ Investment of holding in business Servic e FUNDING REQUIREMENT Funds Required For: Capital Expenditure £.................. Research & Development £ ................. Handbook of Venture Capital Documentation Page 24 Working Capital £ ................. Other (please specify) £ .................…………………………………..………… Total funds required £ ………………..(should be equal to total funding package) To be provided by: Management / Existing Investors £..................Confirmed? Y/N New Equity Investors £..................Confirmed? Y/N Bank (name) £..................Confirmed? Y/N ….……………………….…. Grants (type) £...............…Confirmed? Y/N ..……………………………. Required from Investor Co £................. Total Funding Package £.................. (should be equal to total funding requirements) FINANCIAL INFORMATION (to include proposed funding from Investor Co) Historical Historical This Year Year End ................. ................. .......... Turnover ................. ................. .......... Gross Profit ................. ................. .......... Profit Before Tax …………… ................. ................. ................. Fixed Assets ................. ................. .......... Current Assets ................. ................. .......... Current Liabilities ................. ................. .......... Long Term Liabilities ................. ................. .......... Handbook of Venture Capital Documentation Page 25 Net Assets ................. ................. .......... Equity ................. ................. ................. .......... Total Shareholder Funds ................. ................. .......... Retained profit …………. …………… …………. …………. Number of employees (full time equivalents)................. .......... Date of latest Audited Accounts ................. Date of latest Management Accounts ................. Auditors: Advisers: Solicitors: Bankers: DECLARATION: I warrant that all of the questions above have been correctly and accurately completed ------------------------------------------------------ --------- -------------------------- --------------------------- Signed Position Date Please post your completed application form together with your business plan and any other supporting documentation (both hard copy and on disk) to Investor Co (+ contact details……………) Handbook of Venture Capital Documentation Page 26 Document Number 4 Document title Enquiry sheet Purpose of document Begins process of Investor Co project record keeping – a critical aspect of VC. Reporting document to Board or Investment Panel. Example of use In this example, the basic details are logged. The Enquiry Sheet will form part of a report to the Board or Investment Panel. Investment Executives judge whether or not to proceed as early as possible (to be fair to the applicant and to keep Investor Co‟s cost-base down). Key sensitivities Early filtration of possible investments is a key function for the successful venture capitalist. Decision-rules may apply. Investor Co Limited Enquiry Sheet Name & Address: New Co Number: 5/01 Date: 1 February 2001 Completed By: (name) Contact Name: (name) Adviser: (name) Phone Number: Phone Number: 0131-xxxxxxxx email Type of Business: Hardware/software Biotechnology Engineering/ electronics/ textiles/ food/ health/ chemical/leisure/ Internet Related/ other … Nature of business: Sector Brief outline of proposal (name) is essentially a comparison shopping site providing a single source of info about price, service, delivery, availability etc. Incorporated in Sept 00, New Co has already developed a real-time multithreaded and highly efficient search engine and is currently in the process of signing up a number of the largest e-commerce merchants. We like the people but are concerned that the project is too risky in this economic climate. Some indication that they are having difficulty raising funds and so are looking for seed funding now with a view to a substantial investment in the summer. Not for us at this time Handbook of Venture Capital Documentation Page 27 Legal Structure: Sole trader/ Partnership / Limited Company Stage: Seed /Start-up /Early stage Expansion / MBO / MBI Date Established: 2000 Number of employees : 3 (founders) Amount Required: EUR 350,000 Other Syndicate Partners: Handbook of Venture Capital Documentation Page 28 Document Number 5 Document title Enquiry log Purpose of document Enables statistical analysis of number and type of enquiries. Patterns of enquiry will emerge for venture funds over time. Where enquiries are low or too high, actions such as marketing and publicity can be adjusted accordingly. Example of use Here simple criteria are used. Key sensitivities In other circumstances logging criteria would reflect policy priorities such as women entrepreneurs, age of applicants or geography. 01/32 01/33 01/34 01/39 1 May 2 May 3 May 8 May Client name New Co (a) New Co (b) New Co (c) Address (name) (name) (name) Contact (name) (name) (name) Phone xxxxxxxxxxx xxxxxxxxxxx xxxxxxxxxxx Email xxxxxxxxxxx xxxxxxxxxxx xxxxxxxxxxx Status O D D Funding EUR 400K now EUR 50K EUR 250k with EUR 2m next year Source O O O Type E E E Responsibili (name) (name) (name) ty Comments Spin out software e-business Design and company from solutions distribution Edinburgh company set up of a range of University in 1995 and fashion developing a suite now seeking to leather goods. of programs for e- expand and Very small learning creators. relocate. operation with Visit arranged Looked at initial losses initially a and difficult couple of to see how years ago. this could be Previous an attractive losses and equity urgent nature proposition of refinancing for us. Small package may loan may be a make this a possibility. difficult one Referred to for us to Business pursue but Centre will have a initially preliminary discussion. Sourc A: O: Other Type B: Buy Stat A: Active e Accountant Out us B: Bank S: Solicitor Exp: D: Dead Handbook of Venture Capital Documentation Page 29 Expansion I: Investment C: IC: Invest. R: Rescue O: Open - Consultant Conference awaiting developmen t D: Direct V: Other VC S: Start House up W: Web site E: Early stage Handbook of Venture Capital Documentation Page 30 Document Number 6 Document title Terms and conditions Purpose of document To explain to the potential New Co how Investor Co operates Example of use A standard notice Key sensitivities Charging arrangement fees INVESTOR CO SUMMARY OF MAIN TERMS AND CONDITIONS Structure of Investment We aim to flexible, practical and constructive in our approach, tailoring each investment package to the company's needs, stage of development and the needs of our investment partners. Investment may be a combination of ordinary, „A‟ ordinary shares, preference shares and/or loan stock. For established businesses and those generating income, we normally expect our return to be a combination of income (in the form of interest/dividend payments) and capital gains (by a premium on redemption of preference shares and/or by a trade sale or floatation). Where dividends are appropriate, these are normally payable every 6 months and may have a fixed (x% of cost) and/or a participating element e.g. (y% of profits before tax). Alternatively we may encourage a policy to distribute a certain percentage of profits to all shareholders. Ordinary equity is particularly suitable for seed/very early stage investments and those involving emerging technologies. In these cases, dividends may not be possible in the early years and the focus will be more on building up shareholder value for future exit We will only make our investment when we are satisfied with the information provided to us. In particular, financial details and the background and relevant skills of the main promoters, as well as confirmation that any other funding will be in place at completion. We will not normally seek to have more than 30% of the equity in any investee company (frequently much less). Where our Handbook of Venture Capital Documentation Page 31 initial financial investment is substantial in relation to management equity however, we may look for additional protections. Syndication/Co-Investment We are happy to work alongside other funders and have in the past syndicated with most of the other local and national funds, particularly those also interested in economic development We have also worked with private investors/business angels where they can bring a particular expertise Of particular importance is the financial contribution made by the management shareholders alongside whom we are sharing the risks (and rewards). This may vary depending upon individual circumstances but must demonstrate commitment to the business and to its success. Income/Dividend/Asset Protection We will expect salaries of executive directors and senior employees to be set at a realistic level dependent upon the size and nature of the business and upon what the business can afford at a particular stage of its development. Increases beyond this, (which could affect dividend payments), will only be permitted with our written consent. Salaries agreed will include pension contributions, company cars and all other benefits in kind. We will expect to be involved in your annual budget setting and thereafter will expect you to adhere reasonably to expenditure on both capital and income. Any material deviation will have to be agreed with us in advance as will any further fund raising of any kind. Where the directors have contracts of employment, we normally expect these to be for a period not exceeding one year initially with a maximum of six months notice on either side; we also expect some level of restrictive covenant should any director leave the company for any reason. Handbook of Venture Capital Documentation Page 32 On Going Involvement Investor Co is a 'hands on' investor i.e. we don't see our involvement ending when we hand over our cheque; rather, we aim to do all we can in a practical way to help you achieve your objectives. This will usually mean our coming along to your monthly Board meetings. If we think it helpful, it may involve our appointing a non-executive Director to your board; in particular we will always want to retain this right and the right (in conjunction with other syndicate members) to decide which of the Directors should be Chairman (whether or not we choose to exercise it). The cost to you - for which you will receive the benefit of our help and support - will depend largely on the time spent but typically will range from EUR 2,000 per annum for monitoring and advice, to EUR 10,000+ for an experienced Chairman who by his experience and contacts can help you develop your business. Costs will always be discussed with you in advance and before you commit yourself to accepting our offer. Costs and Expenses Costs will depend on the amount involved and the complexity of the deal. You will normally be expected to pay a negotiation fee of 2% and to bear all legal and necessary due diligence charges. Our external Solicitors will normally only be instructed once you have accepted our main terms. You will then be responsible for all charges whether or not the deal proceeds to completion. In most cases, we will be able to obtain an estimate for you in advance. Handbook of Venture Capital Documentation Page 33 Document Number 7 Document title Investment submission Purpose of document Gain acceptance of Board or Investment Panel to pursue negotiations i.e. eliminate „on principle‟ reasons for rejection Example of use The example is somewhat bland since all recent examples of investment submissions necessarily contain commercially sensitive information Key sensitivities Each fund‟s investment strategy should guide the Board or Investment panel on parameters for the fund‟s investment. INVESTMENT SUBMISSION to INVESTOR CO New Co INVESTMENT EXECUTIVE: (name) DATE: xxxxxxxxxxx 2001 SUMMARY OF MAIN REASONS FOR INVESTING: Experienced management team Product which works! Large and fast growing market KEY SENSITIVITIES Lack of sales and marketing team Immature market Availability and ability to attract key staff NAME AND ADDRESS: New Co and (place) DIRECTORS: (Names) BANKERS: Bank Co AUDITORS: Auditor Co SOLICITORS: Solicitor Co 1. NATURE OF BUSINESS: Design and manufacture of Internet Equipment 2. PURPOSE & SOURCE OF FUNDS Handbook of Venture Capital Documentation Page 34 PURPOSE £ Capital expenditure 180,000 Product development 200,000 Marketing 400,000 Working capital and contingency 420,000 ______ 1,200,000 ======== SOURCE Private investors 300,000 Management 100,000 Investor Co 200,000 Syndicator Co 100,000 Syndicator Co 300,000 Syndicator Co 200,000 _______ 1,200,000 ========= Note that good progress is being made in discussions with private investors. Syndicators Co are still considering the proposal and any shortfall may well be made up by additional equity from a number of business angels 3. STRUCTURE OF INVESTMENT 3.1. To be agreed. 4. INTRODUCTION AND BACKGROUND 4.1. New Co was set up in (date) with EUR 100,000 in seed funding from the founders and in that time, has designed and developed their first product. (Names) were founders of Early Co (a computer network management company based in Livingston) which was sold two years ago to a US company, Buyer Co. 4.2. The company are now seeking to raise a total of EUR 2,000,000 in a mixture of equity and debt to create the Handbook of Venture Capital Documentation Page 35 infrastructure required to successfully market the product, complete the R&D and support team and reach profitability on a sustainable basis 5. PRODUCT/SERVICE 5.1. The company‟s first range of products, the Net Product series (a new concept in Internet Access management), was released in (date). 5.2. Short term developments on the product range will concentrate (details) 5.3. Future products (details) 5.4. The other major opportunity will be (details) 6. SALES/MARKET/COMPETITION 6.1. New Co‟s target market is all organisations with 25+ employees with internet access. The potential market size (details) 6.2. The two most significant competitors are (names) both fairly highly regarded and with aggressive marketing strategies. Where New Co gains is in providing an integrated solution which in the main, its competitors do not. While purchase and installations costs are similar, New Co annual maintenance is considerable less expensive, particularly for large (100+) users 6.3. At present the products are being sold directly (details) 6.4. The next phase of the sales and marketing campaign is to increase the number of UK resellers and then to target the larger European countries via local key distributors and resellers who will carry out a degree of localisation to the product. (details) 6.5. The company sees the establishment of a dedicated reseller network as the key element in their strategy and the majority of the new funding is earmarked for this. Their secondary route to market will be through forming strategic alliances with other equipment manufacturers, systems integrators and service providers. 7. PREMISES Handbook of Venture Capital Documentation Page 36 7.1. For the past year, New Co has been operating from a small serviced office. They are now looking for 200 square metres in (place) 7.2. KEY EMPLOYEES 7.3. The company currently employs three people with plans to increase this by a further eight within the next twelve months. Included in this will be the key appointment of a sales and marketing director together with an effective sales team. A non executive chairman and financial controller will complete the management team and these will also be sought in conjunction with this fund raising. 7.4. (Name) – Managing Director – (bio details) 7.5. (Name) – Technical Director – (bio details) 7.6. (Name) – Financial Director – (bio details). Part-time. FINANCIALS – see also attached appendices The current plan is that the funding being sought now, should be sufficient to take the company through to break even but accelerated growth may be possible if additional funds are generated. Progress will be closely monitored and new funding sought where appropriate and at a point where most value will have been created for the early investors. INVESTMENT DIRECTOR‟S RECOMMENDATION This is a management team who have already taken one technology company from start up to successful multi million dollar sale. While this was not without its difficulties, they have learned a lot of valuable lessons which hopefully they will put to good use in this new venture While the management team is a bit light weight at present, there are plans to strengthen this and if we choose to invest, we should be able to have some influence here. I recommend this investment Handbook of Venture Capital Documentation Page 37 Document Number 8 Document title Internal Rate of Return (IRR) calculation Purpose of document Training or explanatory document Example of use The two examples illustrate simple calculations. Key sensitivities A high IRR means suits all financial stakeholders. Judging the return on simple interest bearing investments (5% simple interest from a deposit account) is straightforward. Where percentage returns and payment periods vary, calculation and judgements are more difficult. Internal Rate of Return (IRR) is the discount rate that results in a net present value of zero given the stream of benefits and costs over time. The IRR does not require a pre-selected discount rate and inherently assumes that the benefits received over the life of the project are reinvested. Since business cash-flows are prone to variability, the IRR is often the preferred standard of VCs to calculate and compare investments. Alternatives include Net Present Value (NPV), which (based upon a pre-selected discount rate) results in an easy computation and decision rule (invest in anything where the net present value greater than zero). An IRR is calculated based on a series of positive and negative income streams over time.7 Calculations will usually be done in Excel (or similar) or on a financial calculator. The formula is: F = -P(1+i)**n - [p(1+i)((1+i)**n - 1)/i] . F is the future value of your investment (i.e., the value after "n" periods) P is the present investment value p is the payment each period n is the number of periods i is the interest rate per period **' is used to denote exponentiation (2 ** 3 = 8). "P" and "p" will be negative. This formula is devised representing cash paid out as negative and cash received (as in the case of a loan) as positive. Technically, IRR is a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments. As such, it can be found not only for equal, periodic investments for any series of investments and returns. There are also two flows to define. The first flow is positive and is the value of the portfolio at the start of the period over which IRR is being computed. The last flow is negative and is 7 For a tutorial see http://hadm.sph.sc.edu/Courses/Economic/irr/irr.html Handbook of Venture Capital Documentation Page 38 the value of the portfolio at the end of the period over which IRR is being computed. The IRR is the rate of return per whatever time unit is used. The IRR is the discount rate that sets the NPV of the given cash flows made at the given times to zero. Handbook of Venture Capital Documentation Page 39 Ass ume £350,000 'A' ords for 21% (us and Bank) Dividends 10% participating IRR: 44.05% GUESS: 30.00% YEAR 2002 2003 2004 2005 2006 ============ ======== ======== ======== ======== ======== ======== PBT(FORECAST) -60 -328 289 1090 1300 PBT(DISCOUNTED) 15 82 -72 -273 -325 --------------------- -------------- -------------- -------------- -------------- -------------- -------------- -45 -246 217 818 975 ============ ======== ======== ======== ======== ======== ======== PART DIV 10.00% 21.68 81.75 97.50 PART DIVI 2 0.00 0.00 PREF DIV 0.00 0.00 0.00 0.00 0.00 ORD DIV 0.00% 0.00 0.00 0.00 0.00 0.00 --------------------- -------------- -------------- -------------- -------------- -------------- -------------- TOTAL DIV 0.00 0.00 21.68 81.75 97.50 ADD:TAX --------------------- -------------- -------------- -------------- -------------- -------------- -------------- GROSS DIV 0.00 0.00 21.68 81.75 97.50 REDEMPTN REDEMPTN PREM DIRS FEES LOAN INTEREST 0.00 0.00 0.00 0.00 0.00 LOAN CAPITAL 0.00 0.00 0.00 0.00 0.00 BUY-OUT 1911.00 --------------------- -------------- -------------- -------------- -------------- -------------- -------------- INCOME -350 0.00 0.00 21.68 81.75 2008.50 ============ ======== ======== ======== ======== ======== ======== £000 INVESTMENT prefs % EQUITY 28.00% ords 350.00 REDEMPTN PREM loan REDEMPTN PREM term 5 rate TAX RATE P/E RATIO 7 DISCOUNT T/O 25.00% Handbook of Venture Capital Documentation Page 40 Ass ume £350,000 'A' ords for 21% (us and Bank) Dividends 10% participating IRR: 52.76% GUESS: 30.00% YEAR 2002 2003 2004 2005 2006 ============ ======== ======== ======== ======== ======== ======== PBT(FORECAST) -60 -328 289 1090 1300 PBT(DISCOUNTED) 0 0 0 0 0 -------------- -------------- -------------- -------------- -------------- --------------------- -------------- -60 -328 289 1090 1300 ============ ======== ======== ======== ======== ======== ======== PART DIV 10.00% 28.90 109.00 130.00 PART DIVI 2 0.00 0.00 PREF DIV 0.00 0.00 0.00 0.00 0.00 ORD DIV 0.00% 0.00 0.00 0.00 0.00 0.00 --------------------- -------------- -------------- -------------- -------------- -------------- -------------- TOTAL DIV 0.00 0.00 28.90 109.00 130.00 ADD:TAX --------------------- -------------- -------------- -------------- -------------- -------------- -------------- GROSS DIV 0.00 0.00 28.90 109.00 130.00 REDEMPTN REDEMPTN PREM DIRS FEES LOAN INTEREST 0.00 0.00 0.00 0.00 0.00 LOAN CAPITAL 0.00 0.00 0.00 0.00 0.00 BUY-OUT 2548.00 --------------------- -------------- -------------- -------------- -------------- -------------- -------------- INCOME -350 0.00 0.00 28.90 109.00 2678.00 ============ ======== ======== ======== ======== ======== ======== £000 INVESTMENT prefs % EQUITY 28.00% ords 350.00 REDEMPTN PREM loan REDEMPTN PREM term 5 rate TAX RATE P/E RATIO 7 DISCOUNT T/O Handbook of Venture Capital Documentation Page 41 Document Number 9 Document title Outline terms and Heads of agreement Purpose of document To form the basis for negotiating a detailed document with investee and syndicators and to identify at an early stage „deal breakers.‟ NEW CO OUTLINE TERMS & CONDITIONS FOR AN INVESTMENT TOTALLING EUR 250,000 (SUBJECT TO CONTRACT) (DATE) Investor Co Handbook of Venture Capital Documentation Page 42 EQUITY TERMS INVESTEE New Co (to be confirmed and agreed) INVESTOR Investor Co PURPOSE The subscription monies are to be used to fund capital expenditure, recruitment and salary costs, and other working capital requirements. AMOUNT Up to EUR 250,000 SUBSCRIPTION By way of [ „A‟ ] Ordinary Shares in New Co. OWNERSHIP Following completion of the share subscriptions the resulting shareholdings would be as follows: Management % Investor Co % Other investors % VALUATION The proposed structure values the Company on a pre-money basis at EUR 750,000. Handbook of Venture Capital Documentation Page 43 CONDITIONS PRECEDENT Investor Co to be satisfied with the following prior to the facilities being available :- FINANCIAL INFORMATION - The Company's Management Accounts to [30 April xxxx] - A certified pro forma Opening Consolidated Balance Sheet. - The level and terms of outstanding debt facilities [or contingent liabilities] as at the date of subscription and confirmation that no events of default are outstanding or have been waived. DUE DILIGENCE - An Accountant's Report addressed to Investor Co (the nature and content of which to be discussed and agreed). - A [Commercial/Market] Report addressed to Investor Co (the nature and content of which to be discussed and agreed). - A Legal Report addressed to Investor Co (the nature and content of which to be discussed and agreed). - Management references. - The Board of New Co. - There being no material adverse change in the financial condition of the Company or in its trading prospects between the date of its latest Management Accounts delivered to Investor Co and subscription. LEGAL DOCUMENTATION - The Investment Agreement between Investor Co , the Management Team and the Company (including standard Handbook of Venture Capital Documentation Page 44 warranties from the Management Team and the Company). - The Articles of Association of the Company. - The Service Agreements of the Management Team. FINANCE - A minimum of EUR 600,000 to be invested in this round of fundraising (including EUR 250,000 from Investor Co ). ONGOING CONDITIONS FINANCIAL - Annual consolidated audited accounts within 90 days of the end of each financial year. - Annual budgets 4 weeks prior to each financial year end. - Monthly management accounts within 4 weeks of each month end (containing profit & loss account, cash flow and balance sheet statements), calculations of financial covenants and any other financial information that Bank Co may reasonably require from time to time. SHARE CAPITAL - No issues of any class of new shares or other variations to the share capital of New Co or any of its subsidiaries (without Investor Co consent); - No transfer or disposal of shares by Directors or employees (without Investor Co consent); - If any employee and/or director leaves the Company his/her shares will be offered for sale at fair value to the other shareholders or as otherwise directed by the Board; - A minimum of 10% of profits after tax to be distributed by way of dividend to the [„A‟] ordinary shareholders following the signature of each year‟s annual audited accounts. No other Handbook of Venture Capital Documentation Page 45 distribution by way of dividend, share capital redemption or otherwise is declared or paid (without Investor Co consent); - A compensatory dividend to be paid to the [„A‟] ordinary shareholders should remuneration awarded to the directors (including bonuses) exceed EUR [to be agreed] per annum. OPERATIONS - No material change in the nature of the business - No acquisitions of assets, shares or businesses exceeding EUR 250,000 (in aggregate) in any year, other than as approved in the annual budgets - No borrowings other than as approved in the annual budgets - No variation to the terms of engagement of any Director or Senior Executive of New Co or any subsidiary including fees, remuneration and options (without Investor Co consent). - The company to have its premises based in (place) - No change to the Company‟s accounting reference date or auditors without Investor Co ‟s prior written consent. BOARD - Investor Co to have the right (in consultation with the Management Team) to appoint a non-executive director to the board of the Company (whose remuneration shall be paid by the Company). Investor Co to also have the right to appoint the non- executive chairman (in consultation with the Management Team). - Investor Co to appoint a non- executive remuneration committee. - Investor Co to have the right to have a Investor Co representative present (as an observer) at the Handbook of Venture Capital Documentation Page 46 Company‟s board meetings, from time to time. ARRANGEMENT FEE EUR 12,500 payable on first drawdown of these facilities. EXPENSES Company to meet the cost of (or reimburse Syndicator Co on a full indemnity basis for) all legal, valuation, due diligence and other charges/expenses (+VAT) incurred in connection with the Investment. MONITORING FEE EUR 6,000 pa (payable monthly in advance) during the life of the investment. GOVERNING LAW The agreement shall be subject to Scots Law. DISCLOSURE No disclosure or press release may be issued about Syndicator Co's investment unless its wording is agreed between the Company and Syndicator Co , unless required by law or any regulatory authority. DISCLAIMER This outline of investment is subject to and conditional upon Investor Co Board approval and the execution by the parties of investment agreements reflecting these terms and conditions and in a form acceptable to Investor Co , (and Investor Co reserves the right to incorporate such other terms and conditions into the investment agreements as it may consider appropriate) prior to the occurrence of which Investor Co shall be under no obligation whatsoever to make this investment. TIME LIMIT These Outline Terms and Conditions are open for acceptance until 5pm on 1 June xxxx after which time this offer of investment shall lapse. Handbook of Venture Capital Documentation Page 47 Handbook of Venture Capital Documentation Page 48 Document Number 10 Document title Formal offer letter Purpose of document A formal offer, (often subject to contract) to supply finance, for specified purposes and in exchange for specified assets and options. Example of use Here New Co is buying a Business (Target Co) for which transaction it needs the approval of Investor Co. Key sensitivities Whilst prescribing the use to which funds are to be put, investors will not wish to over-prescribe and therefore constrain management. Both sides to a contract benefit from clarity over e.g. share rights, Board structure, warranties and indemnities and abortive costs. SOLICITOR CO Our reference: xxxxxxxxxxx August xxxxxxxxxxxxxx The Directors New Co (place) The Shareholders of New Co Limited all as set out in Appendix 1 New Co Limited Acquisition of New Co Limited (“the Company”) We act on behalf of Buyer Co a company incorporated in Scotland (registered number xxxxx) being registered in Scotland under the Companies Acts and having its registered office at (place) and are writing to outline the terms on which our clients offer (“the Offer”) to purchase from the persons listed in Appendix 1 of the Schedule (“the Shareholders”) the whole ordinary share capital of Target Co a company incorporated in Scotland (registered number xxxxxxxx) and having its registered office at (place) being the aggregate of those ordinary shares of EUR 1 each set out in Appendix 1 opposite the Shareholders‟ names (“the Offer Shares”). 1. Conditions Precedent The purchase by Buyer Co of the Offer Shares (“Completion”) on the terms set out herein will be entirely conditional Handbook of Venture Capital Documentation Page 49 upon the purification of the following conditions precedent to the satisfaction of New Co in its sole discretion:- a) completion of due diligence on the Target Co satisfactory to New Co; b) New Co agreeing terms with certain of the creditors of the Company for the restructuring of the terms of the loan facilities granted to the Company by such persons; c) Buyer Co being satisfied that all outstanding options over shares in the Company have been waived; d) Buyer Co being satisfied with the Company‟s management accounts produced to the end of June 2001 and financial position generally; e) Buyer Co being satisfied that the proposed change of control shall not prejudice the Company‟s material trading relationships; f) Buyer Co receiving sufficient acceptances of this Offer where on Completion thereof it could effect the provisions referred to in Clause 6 hereof; g) Buyer Co being satisfied with the form and content of such ancillary documents to the Completion as it considers reasonably necessary; h) Buyer Co being satisfied with the terms and status of the Regional Selective Assistance Award as given to the Company. 2. The Purchase Consideration The purchase price of the Offer Shares is a total price of EUR 200,000 being a price per Offer Share of EUR 20 (“the Consideration”) subject to the following:- a) 50% of the Consideration shall be paid to the Shareholders at Completion pro rata in proportion to the number of Offer Shares held in consideration for the transfer of the relevant Offer Shares; b) the balance of the Consideration shall be paid to the Shareholders on the first anniversary of Handbook of Venture Capital Documentation Page 50 Completion and shall be fully guaranteed by the Bank Co. The proposed purchase price assumes, in addition to the matters listed above, that there will be no material alteration of existing trading arrangements or loss of major customers. 3. Shareholders‟ Warranty Acceptance of this offer by each of the Shareholders will be deemed to constitute a warranty given at Completion by that Shareholder that:- a) The relevant Offer Shares held by that Shareholder in respect of which this Offer is so accepted are being transferred on Completion free of all liens, charges and encumbrances and together with all rights attaching thereto; b) That the acceptor is the registered and beneficial owner of the Offer Shares so referred to opposite the acceptor‟s name in Appendix 1. 4. Announcements & Confidentiality Neither we nor you nor Buyer Co nor any company within Buyer Co‟s group or its personnel shall prior to Completion make any announcement in relation to the proposed acquisition without first obtaining the other‟s written agreement. In consideration of your making available information to us, our clients, and their advisers, our clients undertake to keep same confidential save as may be required by law. 5. Exclusivity You undertake to Buyer Co that from the date of acceptance of this proposal until 31st August 2001 you will not enter into negotiations with or provide any information concerning the Company to any prospective purchaser or other person with a view to a sale of your shareholding in the Company. 6. Purchase of Minority Interests If sufficient acceptances are received Buyer Co intends to apply the provisions of section 428 to 430 of the Companies Act 1985 to acquire compulsorily any remaining Handbook of Venture Capital Documentation Page 51 Offer Shares in respect of which the Offer has not been accepted. Section 428 to 430 allow an offeror, whose offer for shares of a particular class in another company has been accepted by the holders of at least 90% in nominal value of the class of shares involved, to acquire the remaining shares compulsorily at the same price. Handbook of Venture Capital Documentation Page 52 7. Information The following documents have been delivered to the Company‟s principal place of business at (place) and are available for inspection free of charge there:- a) the Memorandum and Articles of Association of the Company b) the Memorandum and Articles of Association of Buyer Co c) the audited accounts of the Company for its last two accounting reference periods 8. Timing This offer shall remain open for 21 days following the date of issue and upon acceptance all parties will use their respective best endeavours to complete the acquisition by 31st August 2001 failing which the terms of this Offer will lapse save for the provisions of Clause 4 which shall continue thereafter. This Offer is governed by and construed by the laws of Scotland and upon acceptance the parties hereto irrevocably submit to the jurisdiction of the Court of Session. If you are in any doubt about this offer you should consult a person authorised under the Financial Services Act 1986 who specialises in advising on the sale of shares or debentures. We look forward to your early acceptance. Yours faithfully Solicitor Co Form of Acceptance I,……………….. hereby accept the terms of the foregoing offer of which this is a duplicate. ........................................ ........................................ Signed Date Handbook of Venture Capital Documentation Page 53 Document Number 11 Document title Reference document seeking diligence on management Purpose of document To seek references about a proposed member of a New Co management team. The letter would often be followed up by a telephone call or discussion. Our Reference: xxxxxxxxxxxx (Date) ( Name and Address) Dear ( ) We are considering making an investment of ( ) as part of a total package of ( ) in [a new venture] ( ) Limited. ( ) a (Director/Shareholder of the Company), has given your name as a [personal] referee. I would be very grateful to receive any comments which you may have with regard to his integrity and suitability in this venture. Your reply will, or course be treated in the strictest confidence. I look forward to hearing from you at your earliest convenience. Yours faithfully (name) INVESTMENT DIRECTOR Handbook of Venture Capital Documentation Page 54 Document Number 12 Document title Enquiries for Directors Purpose of document Diligence on potential New Co Directors Example of use Standard Key sensitivities Attention to detail over personal diligence can be revealing to investors. Investor Co Address date ENQUIRIES FOR DIRECTORS NOTES:- (1) Please answer all questions. If a question is answerable in the negative, please answer "NO". Do not leave any section blank. (2) If insufficient space is provided for completion of any paragraph, additional information may be entered on a separate sheet of paper duly signed and attached. 1. Director's full name ............................................................ ............................................................ ....... 2. Titles and qualification (i.e. B.A., FRICS, etc) ............................................................ ............................................................ ....... 3. Age Date of Birth ............................................. ……………………………….. Handbook of Venture Capital Documentation Page 55 4. Home addresses and telephone numbers during the last five years. 1) ......................................... 2) ......................................... 3) ………………………… .......................................... ......................................... ......................................... .......................................... ......................................... ......................................... .......................................... ............... ............... ........... ............... ............... ........... 5. Business address and telephone number ............................................................ ............................................................ ............... ............................................................ ............................................................ ............... ............................................................ ............................................................ ............... ............................................................ ............................................................ ............... 6. References - Business 1) Bankers 2) Other Handbook of Venture Capital Documentation Page 56 ………………………………………….. …………………………………… …………………………………………… …………………………………… …………………………………………… ……………………………………. …………………………………………… …………………………………….. 7. Position in company ……………………………… 8. Date of joining ……………………………… 9. Current Salary and Benefits Salary ……………………………………………….. Pension ……………………………………………….. Car ……………………………………………….. Other ……………………………………………….. BUSINESS INTERESTS 10. (a) List all shareholdings currently held by you or your spouse which represent more than 5% of the relevant company. List also details of any unincorporated business or partnership in which you are involved. .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ .................................................. Handbook of Venture Capital Documentation Page 57 ....................................................... ........................ .................................................. ....................................................... ........................ (b) List all directorships/interests in any unincorporated business or partnership held by you or your spouse during the last fifteen years (including those still held by either of you) .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ (c) Have you ever been a director of a company, sole trader or partner in a business which, or against other directors/partners of which, criminal proceedings have ever successfully been brought? Handbook of Venture Capital Documentation Page 58 .................................................. ............................. If so, please supply full details on an additional page. (d) Are any companies in which either you or your spouse hold directorships or are substantial shareholders, or any unincorporated business or partnership in which either you or your spouse has a substantial interest, currently involved in any High Court, Court of Session, Sheriff Court, County Court or Crown Court proceedings? ............................................................ ................... If so, please supply full details on an additional page. (e) Have you ever been convicted of any offence as a result of, or been a director of a company which has been the subject of or linked with an inspection by the Department of Trade and Industry? ............................................................ .................. If so, please supply full details on an additional page. PERSONAL 11. (a) Are you satisfied that you and your spouse have the financial resources to meet your existing and anticipated financial liabilities? ............................................................ .................. Handbook of Venture Capital Documentation Page 59 (b) Have you ever been convicted of a criminal offence, other than motoring offences? ............................................................ .................. If so, please supply full details on an additional page. (c) Are you currently, or have you ever been the subject of any investigation by the police, the Inland Revenue, the Department of Health and Social Security or any other Government body? ............................................................ .................. If so, please supply full details on an additional page. (d) Have any Sheriff Court, High Court, County Court or Court of Session judgements been issued against you or your spouse in the last five years? ............................................................ .................. If so, please supply full details on an additional page. (e) Have any allegations of fraud ever been made against you or any of your co-directors? Handbook of Venture Capital Documentation Page 60 ............................................................ .................. If so, please supply full details on an additional page. (f) Are you aware of any legal proceedings which may come to Court in the future, in which you are likely to be a party? ............................................................ .................. If so, please supply full details on an additional page. (g) Have you ever been the subject of disciplinary proceedings by any professional body? ............................................................ .................. If so, please supply full details on an additional page. PREVIOUS EMPLOYMENT 9. (a) Please supply a list of the names of your employers during the last ten years and the dates during which you worked for them, together with a short description of your job, and your job title in each case. ............................................................ ................................................................. .... Handbook of Venture Capital Documentation Page 61 .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ (b) Please state your reason for leaving each place of employment. ............................................................ ................................................................. .... .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ .................................................. ....................................................... ........................ Handbook of Venture Capital Documentation Page 62 (c) Have you ever been dismissed, suspended or asked to leave your employment for any reason during your working career? ............................................................ ................................................................. .... If so, please supply full details on an additional page. (d) Please give details of any major periods of illness during the last ten years through which you have been absent from work. ............................................................ ................................................................. .... (e) Please attach a copy of your current CV. 10. References - Personal 1) Bankers 2) Last Employers 3) Other ............................................. ............................................. ............................................. ............................................. ............................................. ............................................. ............................................. ............................................. ............................................. STATEMENT OF ASSETS AND LIABILITIES Assets EUR EUR House - Main residence .......... Handbook of Venture Capital Documentation Page 63 Other property .......... Motor Vehicles .......... Investments .......... .......... .......... .......... Building Society Deposit .......... .......... .......... Bank Balances .......... .......... .......... Other .......... Liabilities Mortgage .......... Hire Purchase/Lease .......... .......... .......... .......... Credit Cards .......... .......... .......... .......... Bank Loans .......... .......... .......... Other .......... .......... .......... DECLARATION I ................................................................. ..................... a Director/Shareholder of ................................................................. ................................................................. .. declare that the information and answers supplied in reply to the foregoing paragraphs are true. Handbook of Venture Capital Documentation Page 64 Signed ................................................................. .............. Dated ............................................................ 19................. Handbook of Venture Capital Documentation Page 65 Document Number 13 Document title Engagement letter Purpose of document Especially in complex deals, accountants may be engaged to check the financial due diligence of a business plan. Example of use Standard Key sensitivities DRAFT PRIVATE & CONFIDENTIAL The Directors Investor Co Place Our reference: xxxxxxxxxxxxxx xx June 2001 Dear Sirs ENGAGEMENT LETTER - FINANCIAL FORECAST REVIEW New Co We shall be pleased to act for Investor Co Limited in the matter of the proposed investment in New Co. This letter and attached Appendix sets out the terms of our engagement in relation to this project. Our Contract Once you have read this letter, please confirm that you accept the contents by countersigning the enclosed copy and sending it back to us. If there are any points which do not agree with your understanding or which you would like to discuss with us, please let us know. The scope of our work will be limited to the matters set out in this letter, subject to any subsequent variations agreed by both parties in writing. Handbook of Venture Capital Documentation Page 66 Background It is understood that Investor Co Limited and Bank Co are preparing to invest EUR 100,000 and EUR 300,000 respectively in New Co. In this regard, Consult Co have been asked to review the business plan and financial forecast prepared by New Co. Scope of our Engagement We shall carry out an overall review of the financial projections prepared by New Co for the three years to 31 March 2004 and in particular, we shall comment on:- 1 The consistency of the figures in the financial model with the accompanying assumptions and the “Expansion Plan” prepared by New Co. 2 The internal consistency of the financial projection model (although, for the avoidance of doubt, we will not carry out a full arithmetical check on the figures provided). ……/ 3 The accounting policies adopted by the company for the purposes of the financial projections. 4 The appropriateness of the assumptions made by New Co underlying the figures presented. We shall present our report in a letter format. A draft will be issued for comment to Investor Co Limited and New Co on Friday 15 June and a final report will be issued as soon as is practicable thereafter. Our Engagement Team Name ……. will be the engagement Partner on the work, which we carry out for you, assisted by other staff as appropriate. Information and Documents Our advice will be based on the information received from New Co We must have access to all the information and documentation that we need to carry out our responsibilities. New Co have agreed to provide us promptly with all information and documents they consider to be relevant to the engagement and any other information or documents that we specifically request. New Co have also agreed to inform us of any circumstances which may alter the position. In particular, they must let us know about Handbook of Venture Capital Documentation Page 67 any material changes to their business that may have an impact on the engagement. Our Fees Our fees for the engagement will no more than EUR 2,250 plus VAT. Our payment terms are 30 days and the fee will be rendered on presentation or our report. Our fees will be payable by New Co. Liability Consult Co will perform the engagement with reasonable skill and care and acknowledges that, subject to the following provisions, it will be liable to you for losses, damages, costs or expenses caused by its negligence or wilful default. You agree that:- 1 Consult Co will not be so liable if such losses are due to provision or false, misleading or incomplete information or documentation or due to any other act or omissions of any other person other than (name). 2 Consult Co shall have no other liability of any nature, whether in contract, tort or otherwise, for any losses whatsoever and howsoever caused arising from, or in any way connected with, this engagement. 3 The aggregate liability whether to you or any third party, of whatever nature, whether in contract, tort or otherwise of Consult Co for any losses whatsoever and howsoever caused, arising or in any way connected with this engagement will not exceed EUR 200,000. 4 Nothing in this section of our letter shall impose on (name) any liability of any kind or for any amount which Consult Co would not have or preclude any defence which Consult Co would have but for this section. Nothing in this letter shall exclude or restrict any liability of Consult Co for fraud or dishonesty or to the extent that it cannot do so by law. In this section Consult Co refers to Consult Co Accountants, its Partners, Directors, Staff and Agents, and in all cases any successor or assignee. 5 You agree the provisions of this section with us for our benefit and as trustees for the benefit of other Consult Co parties. You agree that you have fully considered the provisions of this section and the other provisions of this Handbook of Venture Capital Documentation Page 68 letter and that they are reasonable in the light of all factors relating to this engagement. If any terms or provisions of this section are, or become, invalid, illegal or unenforceable, the remainder shall survive the unaffected. Confidentiality We will not disclose any confidential information which we obtain in carrying out this engagement to any other persons without your permission except as required by law, court proceedings, regulations or professional duties Yours faithfully Consult Co I accept the terms of engagement set out in this letter and the Appendix on behalf of Investor Co Limited. Signed………………………………………………… Director Date……………………………………………………. Handbook of Venture Capital Documentation Page 69 Document Number 14 Document title Financial forecast report Purpose of document Financial due diligence report Example of use Where a company is trading it is important to identify that reported results are accurate and complete. Key sensitivities PRIVATE & CONFIDENTIAL The Directors Investor Co Limited (address) Our reference: xxxxxx (date) Dear Sirs New Co FINANCIAL FORECAST REVIEW In accordance with our terms of engagement dated xxxxxx 2001, we are writing to present the results of our review of the financial projections prepared by the Directors of New Co in connection with the proposed investment by Investor Co Limited, Bank Co and others. As set out in our Terms of Engagement, we have carried out an overall review of the financial projections prepared by New Co for the three years to 31 March 2004 and set out our comments thereon. Our particular areas of emphasis in carrying out our review have been :- 5 The consistency of the figures in the financial model with the accompanying assumptions and the “Expansion Plan” prepared by New Co. 6 The internal consistency of the financial projection model (although, for the avoidance of doubt, we will not carry out a full arithmetical check on the figures provided). 7 The accounting policies adopted by the company for the purposes of the financial projections. Handbook of Venture Capital Documentation Page 70 8 The appropriateness of the assumptions made by New Co underlying the figures presented. 9 The adequacy of the proposed funding to enable New Co to meet its liabilities as they fall due over the period of the financial projection. We have carried out our review on the basis of information and explanations supplied by the Directors of New Co and would comment as follows:- a) The figures presented in the financial models appear consistent with the accompanying schedule of assumptions and the “expansion plan” prepared by the directors of New Co in contemplation of the investment. b) We have reviewed the internal consistency of the financial projection model and found this to be satisfactory. c) The accounting policies adopted by the company for the purposes of the financial projection appear reasonable and appropriate to the company‟s circumstances. However, we would expect that, for statutory accounts purposes, professional fees payable in relation to the issue of shares would be set against the share premium account arising on that issue, rather than being charged directly to profit and loss account. d) In relation to the assumptions made by New Co underlying the figures presented, we would make the following points. - Outstanding trade debtors are projected to represent 45 days sales. New Co is operating in a market where many customers will be supplied on a one-off basis. In those circumstances, we would consider an average of 60 days debt to be more prudent for projection purposes. - It is assumed that the creditor for PAYE and NIC at each month end represents 25% of the gross pay for the previous month. No allowance is made for employers NIC. We would consider that a more appropriate figure would be 30% of gross salary, plus employers NIC. - Included within the financial projections are detailed schedules of projected staff requirements, costs and estimated recruitment dates. Whilst these schedules cover technical and marketing staff in considerable detail, we consider that there might be a further requirement for administrative support staff. We consider that in order to meet the internal, external and statutory accounting and reporting requirements of the organisation, additional expenditure may be required in this area. Having considered Handbook of Venture Capital Documentation Page 71 this point, the directors remain of the opinion that the requirements of the business until October 2003 can be met through increased utilisation of the one existing administration staff member and additional input from (name) as and when required. - We note from the “Expansion Plan” that during the period from October 2001 to December 2002 turnover is projected to increase by 500% and, in addition, the company plans to launch upgraded products in Q4 of 2001, Q2 of 2002 and Q4 of 2002. During that period the anticipated staff requirement rises only by two and there is no significant rise in the cost of bought-in research and development costs. The directors consider that the resource currently included within the projection is sufficient to carry out the level of development specified in the business plan. - Expenditure on fixed assets during the lifetime of the projection is limited to an initial EUR 26,000 followed by EUR 4,000 per additional employee, which is projected to be incurred at the time of recruitment. Replacement of obsolete fixed assets is projected to commence with expenditure of EUR 5,000 in February and March 2004. We consider that, as the company‟s operations expand, it is likely that there will be a requirement for capital expenditure beyond these amounts. This would cover such items as the upgrade of IT and communications systems, additional software licenses and the fit out of additional office space as the company expands. The directors consider that there will be no significant requirement for capital expenditure beyond what is projected until after March 2004 and intend that any minor items of capital expenditure be met from the contingency within overheads which amounts to EUR 90,000 in year 2 and EUR 200,000 in year 3. E) The effect of our observations on the projected cash position at each year end is illustrated below:- 31/03/0231/03/0331/03/04 EUR EUR EUR Cash balance per projection 150,000 30,000 650,000 Less : effect of increased trade debt (30,000)(100,000) (260,000) Add : effect of increased PAYE/NIC creditor5,000 6,000 15,000 ----------------------------- ------- Revised cash position 125,000 (76,000)455,000 ======= ======= ======= The financial projection does however include a 10% contingency on operating expenses. The cumulative effect of this contingency on the cash flow position is as follows: (50,000)(125,000) (320,000) ======= ======= ======= Handbook of Venture Capital Documentation Page 72 The financial projection presented for review indicates that, following the receipt of the proposed investment funds in xxxxxx 2001, the company will have a minimum of EUR 50,000cash in hand during the lifetime of the projection This figure is projected to be reached in October 2002. Taking into account the financial effect of the items noted above, (and assuming that the contingency is utilised on other operating items) the company would require an overdraft facility from August 2002 until November 2003 peaking at EUR 110,000 in May 2003. In summary, having carried out our review and in order to demonstrate the sensitivity of the cash flow projection model, we would recommend that the company prepare a revised sensitivity of the projection to include 60 days trade debtors and a 10% reduction in unit sales. Given the element of contingency already built in to the model in relation to operating expenses, we would consider that it is unnecessary to make any increase in order to test sensitivity in that area. If you wish to discuss further any of the matters raised above, please contact … name …… or … name …… at the above address. Yours faithfully (name) Handbook of Venture Capital Documentation Page 73 Document Number 15 Document title Marketing diligence proposal Purpose of document Where markets are newly emerging or rapidly changing, a specialist marketing consultancy may be engaged to check business plan projections. Example of use Key sensitivities For new technology products are notoriously difficult to predict market size, share and competition. MARKETING DUE DILIGENCE FOR New Co Proposal Xx xxxxxx 2001 Prepared for: (name) Investor Co Prepared by: (name) Consult Co details BACKGROUND Investor Co is considering an investment in a new start up company called New Co Ltd. New Co aims to design and manufacture a range of (details) products targeted at the small and medium sized enterprise market. The company‟s proposed route to market is to establish a network of dedicated resellers initially in the UK and then in Europe. Investor Co invited (name) of Consult Co to carry out due diligence with specific focus on the company‟s proposed route to market, its pricing and its choice of international markets. Invest Co‟s Investment Director, also expressed interest in assessing the company‟s proposed Sales Director. To gain an understanding of New Co and Investor Co‟ due diligence requirements, (name) familiarised herself with New Co‟ business plan and held a meeting with the two directors, (names), on xxxxxxxx 2001. Handbook of Venture Capital Documentation Page 74 Handbook of Venture Capital Documentation Page 75 CRITICAL INFORMATION In order to meet the due diligence requirements as outlined above, we propose to collect information in the following areas. End user buying behaviour What is the likely demand for New Co‟ product? How do SMEs buy hardware; do they use the reseller channels that New Co is targeting? Do the proposed reseller channels reach the critical decision makers who in the case of (details) Target SME segments Which types of SMEs are likely to have highest demand for content filtering and (details)? Do the proposed reseller channels effectively target these market segments? Resellers Are resellers interested in New Co product? What do they see as the major sales opportunities? What are the strengths and weaknesses of the offer for resellers? What is the experience of existing resellers? Pricing Is the price anticipated by New Co justified by the benefits its products offers to a SME? How does New Co value proposition for a SME compare with that of its competitors? Does New Co offer resellers an attractive combination of potential volumes and margins? How does New Co value proposition for a reseller compare with that of its competitors? Market trends What is the likely impact of major technological trends on the caching side of New Co‟ products? (Details) International markets What is the initial reaction of European resellers to the product? What are the ambitions and capabilities of the current management team, in terms of developing international markets? Sales Director What is the proposed Sales Director‟s experience of launching a new product by a new and unknown company? How would the candidate cope with working in a start up environment? What experience does the candidate have of the technology and of working with the proposed reseller channels? What experience does the candidate have of breaking into international markets? Handbook of Venture Capital Documentation Page 76 Handbook of Venture Capital Documentation Page 77 METHODOLOGY Due to the tight time constraints, we propose to collect the critical information through a relatively small number of interviews. It should be noted that this will, therefore, not be a statistically representative report. However, by selecting interviewees and the interview questions carefully, we will be able to provide a clear picture for Investor Co. We propose to conduct structured interviews with the following types of companies: telephone interviews with SMEs including 3 existing customers 5 telephone interviews with UK resellers including 3 that are currently using (name) Up to 2 face-to-face meetings with reputable local IT resellers. Up to 2 telephone interviews with (details) An interview with the prospective Sales Director We will provide a written report summarising and analysing our findings with full transcripts of the interviews in an appendix. We will be available for a meeting with Investor Co to discuss our findings. TIMING We estimate the time required to complete Stage I will amount to 5 working days. We are available to commence work upon commissioning and present the results by 12 June 2001. COST Fees to carry out the work above will be EUR 4,500 plus VAT at 17.5%. TERMS AND CONDITIONS We will invoice New Co Ltd upon completion of work as defined above. Payment is due within 7 days of receipt of invoice. We will take great care to ensure accuracy and completeness of our work. However, neither (name) nor Consult Co, are able to Handbook of Venture Capital Documentation Page 78 accept legal responsibility for any actions taken on the basis of the information contained therein and its adoption is a matter for Investor Co‟s own commercial judgement. Handbook of Venture Capital Documentation Page 79 Document Number 16 Document title Marketing diligence report Purpose of document Report from expert in response to document 17 engagement Example of use Key sensitivities MARKETING DUE DILIGENCE FOR New Co Report Prepared by: Name Principal Consultant 12 June 2001 Although great care has been taken to ensure the accuracy and completeness of this report, neither … name ….. nor Consult Co can accept legal responsibility for any actions taken on the basis of the information contained therein. This report has been prepared by Name Consult Co …… address etc for Name Investor Co Name Bank Co Name, Managing Director, New Co Ltd Handbook of Venture Capital Documentation Page 80 CONTENT 1 Background 4 2 Methodology 4 3 The Market 6 3.1 Market Size 6 3.2 Market Segments 6 3.3 Market Trends 6 3.4 Competitors 7 3.5 Market Summary 7 4 Marketing Mix 8 4.1 Product and Price 8 4.2 Route to Market and Promotion 9 5 Marketing Skills and Attitude 11 5.1 Potential Sales Director 12 6 Conclusion 14 Appendix: Interviews Handbook of Venture Capital Documentation Page 81 1 BACKGROUND Investor Co and Bank Co are considering an investment in a new start up company called New Co Ltd. New Co aims to design and manufacture a range of internet (details) products targeted at the small and medium sized enterprise market. The company‟s proposed route to market is to establish a network of dedicated resellers initially in the UK and then in Europe. (Name) of Consult Co was invited to carry out marketing due diligence with specific focus on the company‟s proposed route to market, pricing and choice of international markets. In addition, (name) of Investor Co requested an assessment of (name), the company‟s proposed Sales Director. 2 METHODOLOGY To meet the due diligence requirements, we collected critical information from two main sources. Firstly, we gained an understanding of New Co from the company‟s Business Plan, its White Paper and a meeting with its two directors, (name) and (name) on 28 May 2001. Secondly, we conducted a series of structured interviews with existing customers and potential resellers as follows: Existing customers: Customer Co Customer Co Customer Co Potential resellers: Potential Customer Co Potential Customer Co Potential Customer Co Potential Customer Co Two interviews were conducted face-to-face (name and name), the others were conducted over the telephone. Interview transcripts are attached in the appendix. It should be noted that the information presented is not statistically representative. However, we believe that by having selected interviewees and interview questions carefully, we can provide a clear picture for the potential investors. Handbook of Venture Capital Documentation Page 82 3 THE MARKET 3.1 Market Size Interviewees commented that Net Product is a very widely applicable piece of equipment. Its key functions, namely content filtering, reporting and internet access acceleration are of growing interest to small and medium sized companies (SMEs). Even without formal market data, it is clear that there is a very large number of small and medium sized companies which make significant use of the internet. We believe that a sales volume of 1,500 units by the end of year 3 represents a relatively small share of the potential market. 3.2 Market Segments The product is seen to appeal to a wide base of small and medium sized companies. In general, interviewees found it hard to identify specific market segments. Indeed one interviewee commented that the product was sector independent. Two possible segments were mentioned, as follows: Branch or field offices (details) Professional service firms, e.g. lawyers, IT solutions companies, where (details) 3.3 Market Trends Interviewees identified two strong trends which are in favour of New Co‟ product: An inexorably growing demand for increased speed of access to the internet Growing awareness of the risk and potential legal issues of use of internet at work No significant negative trends were identified. The advent of ADSL and ever increasing bandwidth are not seen as a significant threat to the product as companies‟ demand for bandwidth will always exceed supply. Some interviewees commented that application service providers (ASPs) would provide a growing demand for products and that this would be an opportunity for Net Product . Handbook of Venture Capital Documentation Page 83 3.4 Competitors The following competing solutions were mentioned by interviewees: Competitor Co (names) None of these solutions appear to offer the same ease of use or degree of integration as New Co‟s product. The potential Sales Director mentioned that he had seen reports of another plug and play system but he could remember no details of it. We note that New Co has identified many of these competitors, e.g. (names). The company know that they have competition and are realistic about it. 3.5 Market Summary Within the parameters of the research conducted, we would consider that there are reasonable grounds for an investor to accept New Co‟ contention that there is a large and attractive potential SME market for internet acceleration and content filtering products. 4 MARKETING MIX 4.1 Product and Price In general, Net Product was received very favourably by interviewees. They clearly view the product as an „appliance‟ and see it as being: Easy to install Easy to configure Plug and play A self contained box that fits into any environment Reasonably priced We believe that Net Product ‟s uniqueness lies in being an appliance. As such it is more of a triumph of intelligent packaging than a triumph of ground breaking technical content. This may mean that the IPR in Net Product will be relatively hard to protect. Handbook of Venture Capital Documentation Page 84 The main perceived benefit is that Net Product is easy to install and configure. The associated problem, however, is that Net Product may not offer resellers sufficient ability to add value through installation, configuration or training. The reporting function is viewed as a welcome feature. We note that New Co does not make enough of the reporting function in its White Paper. There is no adverse reaction among interviewees to Net Product being Linux based. A number of small technical issues were identified, such as: Lack of scalability Lack of custom reports Lack of clarity on the frequency of URL updates One company, (name), is experiencing a technical problem There is little adverse reaction to the price offered to the end user. Some interviewees see a need for a cheaper cut down version of the product to sell to smaller companies. Others suggest a range of products at low, medium and high price points. Resellers generally consider the cost to them as being acceptable. Some expressed a preference for buying from distributors but it is not clear whether New Co has sufficient margin to allow this. Based on the comments from interviewees, we would consider that New Co has a real and functioning product that potential customers react to favourably and that is priced realistically. 4.2 Route to Market and Promotion The distribution channels for products such as Net Product are highly fragmented. Interviewees indicate that small and medium sized companies tend to buy this kind of equipment on an item-by-item basis from a large number of different resellers, for example: Seller Co Seller Co Handbook of Venture Capital Documentation Page 85 As mentioned previously some of these companies may buy from distributors rather than from original manufacturers. Within SMEs the decision to buy equipment such as Net Product tends to made by senior management but the actual purchase is handled by an IT manager. Resellers such as those interviewed seem to be an appropriate channel to reach these IT managers. Interviewees identify promotion and exclusivity of distribution as the key issues for New Co. Our research leads us to identify two possible approaches to breaking into the market: 1. The appliance like nature of the product calls for an approach similar to that for a consumer electronics product. Here the product is widely distributed, well packaged for end user installation and heavily promoted to both end users and intermediaries. For this approach to succeed, New Co may need to find an OEM partner with an established brand and distribution channels, for example, (details). If New Co was to try this approach on its own, it would need to make a significant financial commitment to promotion at an early stage. It would probably also need to work closely with large distributors who may drive down its prices. In general, this approach could offer an attractive exit route for an investor. 2. Alternatively, interviewees felt that the small company nature of New Co calls for the company to build close alliances with a select number of resellers who actively market and sell the product by word-of-mouth recommendation. The main value of the product to resellers is that it gives them the ability to differentiate their offer from their competitors. This approach would require less promotional support and would be practical in terms of the resources of New Co. It runs contrary, however, to the intrinsic appliance like Handbook of Venture Capital Documentation Page 86 nature of the product which seems to provide little opportunity for resellers to add value. In summary, while the very nature of Net Product calls for extensive promotion to a relatively large market, the resources of New Co call for a small scale, focused approach that may not make most of the strengths of the product. It could be tactically acceptable to start with the small scale more focused approach, in order to build brand awareness, while simultaneously New Co directors would actively identify and nurture relationships with potential OEM partners. The approach that is chosen will affect a number of factors, for example: the type of future products the company develops the required make up of the company‟s senior management team the likely exit route for investors The appropriate export strategy may also depend on the above choice. If New Co decides to go for the large market, large promotion route, it may be most appropriate to target the US first, as this is the largest market. If the company chooses the more gradual approach then Europe would seem a more attractive target. We would suggest that the route to market is a key issue for a potential investor. The question should be resolved at an early stage and the chosen route to market should be practical in terms of the proposed investment. 5 MARKETING SKILLS AND ATTITUDE Feedback from the interviews shows that the two directors of New Co have clear and definite skills in product design and development. We also find the directors to be realistic about competitors and about the price the market will bear. At present, however, the company appears to have little focus on route to market, selling and promotion. We found evidence for this in a number of areas: Existing customers Handbook of Venture Capital Documentation Page 87 (details) In marketing terms the real issue is the company has not actively used existing customers to develop its marketing pitch. UK Resellers (details given) European Resellers (details given) The real issue is that New Co has opportunistically approached a number of resellers that the directors are familiar with from their time at (name). While this is an acceptable approach initially, the company has not yet identified strategically important resellers, aggressively approached them and worked hard to win their approval. Overall, New Co does not yet have an organised marketing or sales plan. In particular, the company does not appear to have plans for: Targeting distribution channels Lead generation A sales process Promotion Most importantly, (details) The two key issues for an investor are: How much power and support are the two technically oriented directors really going to give to the Sales Director? Can a Sales Director be recruited who is able to make „hunger for sales‟ a part of the culture of the company? 5.1 Potential Sales Director We interviewed (name) who has been identified by New Co as a potential candidate for the post of Sales Director. The two Handbook of Venture Capital Documentation Page 88 directors have known (name) as a business contact for a number of years and rate him highly. (name) has 14 years experience as (details). (details) While we would not want to rule out (name) on the basis of a brief telephone interview, we would recommend that New Co search for other candidates to interview alongside (name). We would also recommend that all these candidates including Ian are taken through a full formal interview process. 6 Conclusion In conclusion, our research identifies two strong and positive points. Firstly, there are reasonable grounds for an investor to accept New Co‟ contention that there is a large and attractive potential SME market for (details) Secondly, we consider that New Co has a real and functioning product that potential customers react to favourably and that is priced realistically. Based on these two points, we believe that New Co offers a potentially attractive investment opportunity. There are, however, a number of key issues that the investors will need to resolve with New Co. The route to market is one key issue. We identified two possible routes to market. Which of these is chosen should be resolved at an early stage. The chosen path should be practical in terms of the proposed investment but should also deliver the result that the investors require. A further issue is the role of the Sales Director. We would recommend that the position of Sales Director is given full power and support within the company. The Sales Director needs to be able to make „hunger for sales‟ a part of the culture of the company. It is likely that the investors will need to play an active role in ensuring that this happens. Handbook of Venture Capital Documentation Page 89 Finally, there is the question of who to recruit as Sales Director. We would recommend that New Co searches for other candidates to interview alongside (name) and that these are taken through a full formal interview process. We would recommend that the investors take an active part in the recruitment process. Handbook of Venture Capital Documentation Page 90 Document Number 17 Document title Service Agreement Purpose of document To lay down the terms of employment for individuals avoiding difficulties of later interpretation. In the main the Service Agreement relates to the incoming Management team. Employees are likely to be covered by a normal Contract of Employment. Example of use Standard for medium to large sized company Key sensitivities Often company founders cannot understand why investors should wish to limit expenditure (on management salary and benefit packages) or attach improvements to company performance. 1 TERM ..................................................................................................... 91 2 HOURS OF WORK ................................................................................ 91 3 DUTIES .................................................................................................. 92 4 REMUNERATION .................................................................................. 92 5 PLACE OF WORK ................................................................................. 92 6 HOLIDAYS AND HOLIDAY PAY .......................................................... 93 7 EXPENSES ............................................................................................ 93 8 SICKNESS/INCAPACITY ...................................................................... 93 9 PENSION ............................................................................................... 94 10 CONFIDENTIAL INFORMATION .......................................................... 94 11 INVENTIONS ......................................................................................... 94 12 TERMINATION BY RECONSTRUCTION OR AMALGAMATION ........ 95 13 TERMINATION OF DIRECTORSHIP .................................................... 95 14 EARLY TERMINATION ......................................................................... 95 15 EFFECT OF TERMINATION ................................................................. 96 16 RESTRICTIVE COVENANTS ................................................................ 96 17 OTHER TERMS AND CONDITIONS ..................................................... 97 18 NOTICES ............................................................................................... 98 19 DEFINITIONS ........................................................................................ 98 Handbook of Venture Capital Documentation Page 91 20 GOVERNING LAW ................................................................................ 99 SERVICE AGREEMENT between NEW CO, having its registered office at (place) (the “Company”) and (name) being an employee of New Co (the “Executive”) IT IS HEREBY AGREED: TERM 1) The Company shall employ the Executive and the Executive shall serve the Company in the capacity of Managing Director of the Company unless and until his employment is terminated according to the provisions hereunder. 2) The Executive's employment under this Agreement shall commence on the date of execution hereof and shall continue until : 3) terminated by the Company giving to the Executive not less than 6 months' written notice; or 4) terminated by the Executive giving to the Company not less than 6 months' written notice. 5) In lieu of the notice provided under clause 1.2.1, the Company may terminate this Agreement by notice in writing forthwith following the payment to the Executive of a sum equal to the gross salary and the gross value of all other contractual benefits (under deduction of any tax and other statutory deductions on such sum) which would have been payable during the period of notice specified in clause 1.2.1 or any unexpired part thereof and any such termination shall not constitute a repudiation of this Agreement. 6) Without prejudice to any other competent rights hereunder, the Company shall be entitled, at any time after either party has given notice to the other of termination of this Agreement, to require the Executive until such termination not to attend any place of work and to exclude him from any premises of the Company at such times as the Company in its sole discretion may determine and the Company shall be under no obligation to provide any work for the Executive. 7) For the purposes of the Employment Rights Act 1996, the Executive's period of continuous employment with the Company began on the 1 June 2000. HOURS OF WORK 8) The Executive agrees that he shall work such hours as are necessary for the proper performance of his duties. The Executive shall work a minimum of 37.5 Handbook of Venture Capital Documentation Page 92 hours per week, from 9:00am to 5:00pm Monday to Friday with a break of half an hour for lunch each day. 9) In particular, the Executive agrees to work hours which exceed the maximum weekly working time limit of 48 hours imposed by the Working Time Regulations 1998. The Executive may withdraw his agreement on giving to the Company 3 months' prior written notice. DUTIES During his employment hereunder the Executive shall: 10) perform the duties and exercise the powers and functions which from time to time may reasonably be assigned to or vested in him by the Board; 11) comply with all reasonable requests instructions and regulations made by the Board (or by any one authorised by them) and give to the Board such explanations information and assistance as the Board may reasonably require; 12) well and faithfully serve the Company to the best of his ability and use his best endeavours to promote the interests of the Company; 13) not without the prior consent of the Board of Directors (which consent shall not be unreasonably withheld or delayed) hold an interest in any other business, save that the Executive shall not be prohibited from: 14) holding shares or other securities which are quoted on a recognised stock exchange, so long as such interest does not extend to more than 3% of the total amount of shares or securities of the company in question; REMUNERATION 15) By way of remuneration for his services hereunder the Company shall pay to the Executive a salary at the rate of xxxxx per annum (which shall be deemed to accrue from day to day) payable in arrears by equal monthly instalments on the last day of each month. 16) For the avoidance of doubt, the Executive shall not be entitled to payment for any overtime worked beyond the core hours set out in Clause 2.1. 17) The Executive‟s salary shall be reviewed annually with effect from 1 st July but not decreased by the Board. 18) The Executive shall be entitled to receive on an annual basis a discretionary bonus of [ ] subject to approval by the Board of Directors. 19) PLACE OF WORK The Executive‟s place of work will be the Company's offices at (place) or such other offices as the Company may have from time to time in the United Kingdom as the parties may agree from time to time. The Executive will travel at home and abroad on Company business as is required in fulfilling his duties. Handbook of Venture Capital Documentation Page 93 HOLIDAYS AND HOLIDAY PAY 20) The holiday year shall run from 1st January to 31st December. In addition to the normal bank and public holidays recognised by the Company, the Executive shall be entitled to 25 working days paid holiday during each calendar year to be taken at such time or times as may be agreed with the Board. 21) For the calendar year during which the Executive's employment hereunder commences or terminates, the Executive's holiday entitlement shall be calculated pro rata. 22) Upon termination of the Executive's employment for whatever reason the Executive shall if appropriate either be entitled to salary in lieu of any outstanding holiday entitlement or be required to repay to the Company any salary received in respect of holidays taken in excess of his proportionate holiday entitlement. 23) Any holiday entitlement not taken by the Executive in the relevant calendar year shall not be carried over into the following calendar year without the prior consent of the board (such consent not to be unreasonably withheld or delayed). 24) EXPENSES 25) The Company shall reimburse to the Executive all travelling, hotel, entertainment and other expenses reasonably, properly and necessarily incurred by him in the performance of his duties hereunder provided that on request the Executive shall provide the Company with such vouchers or other evidence of actual payment of such expenses as the Company may reasonably require. SICKNESS/INCAPACITY 26) If the Executive shall be absent from his duties hereunder due to illness, accident or other incapacity he shall be entitled to his full salary for a maximum of six months in aggregate in any period of two years and thereafter statutory sick pay only (if payable) or such additional remuneration (if any) as the Board shall in its sole discretion determine. 27) All payments paid by the Company pursuant to the provisions of sub-clause 7.1 above shall include any Statutory Sick Pay payable to the Executive. Monday to Friday inclusive in each week shall be Qualifying Days for such purposes. 28) In the event of absence due to illness, accident or other incapacity, the Company reserves the right to require the Executive to undergo (at the Company's expense) a medical examination(s) by a doctor appointed by the Company. 29) Notwithstanding the terms of clause 1.3, if the Executive shall be absent from his duties hereunder due to illness, accident or other incapacity for more than six months in any period of two years the Company may terminate his employment by service of the appropriate period of statutory minimum notice. 30) If the Executive's absence shall be occasioned by the actionable negligence of a third party in respect of which damages are recoverable, then the Executive shall: Handbook of Venture Capital Documentation Page 94 31) notify the Company immediately of all the relevant circumstances and of any claim, compromise, settlement or judgement made or awarded in connection with it; and 32) if the Company so requires, pay to the Company any amount received by him from any such third party provided that the payment shall be no more than the amount which he has received from the Company by way of remuneration during the period of absence. 33) PENSION At present, the Executive has no pension entitlement hereunder and no contracting out certificate is in force. CONFIDENTIAL INFORMATION 34) The Executive shall not during his employment hereunder (save in the proper course thereof) or at any time after its termination disclose to any person or persons whatsoever or otherwise make use of any confidential or secret information which he has or may in the course of his employment hereunder come into his possession relating to the Company or any Associated Company or any of its suppliers, agents, distributors or customers, including, without limiting the generality of the foregoing, confidential or secret information relating to the business, technical processes, or finances of any of the aforesaid or relating to know how, inventions or improvements or other matters connected with the products or services developed, manufactured, marketed, provided or obtained by the Company or any others of its suppliers, agents, distributors or customers. 35) The restriction in clause 9.1 shall not apply to information which the Executive is required to disclose by statute or by any legislative or judicial or regulatory order or decree or which is or may become (otherwise than through the Executive's action) available to the public generally. INVENTIONS 36) In view of the fact that the business of the Company and of its Associated Companies (if any) consists in part in the development and exploitation of software, inventions, techniques and methods and that it is the Executive‟s responsibility to further the interests of the Company and any Associated Companies in respect thereof, the Executive agrees that each and every discovery, invention, improvement, trade mark, service mark, copyright and secret process (whether capable of being patented or registered or not) made, created, discovered, developed or produced by the Executive (whether alone or with any other person or persons) wholly or substantially in the course of his normal duties or in the course of duties specifically assigned to him (hereinafter collectively referred to as “Inventions”) whether before or after the date or dates hereof at any time in connection with or in any way affecting or relating to the business of the Company or of any Associated Company or capable of being used or adapted for use therein or in connection therewith shall forthwith be disclosed to the Company or any such Associated Company as the Company Handbook of Venture Capital Documentation Page 95 may nominate for that purpose and the Executive hereby assigns to the Company all IPR rights, copyright and other proprietary rights (if any) (whether existing as at the date or dates hereof and subsequently made, created, discovered, developed or produced) for the full terms thereof throughout the world in respect of all such Inventions. 37) If and whenever required by the Company so to do, the Executive shall, during the course of his employment at the expense of the Company (or its nominee), give and supply all such information, data and drawings as may be requisite to enable the Company (or its nominee) to exploit any Inventions to the best advantage. 38) If and whenever required by the Company so to do, the Executive shall, during the course of his employment, at the expense of the Company (or its nominee) apply or join in or appoint the Company (or its nominee) as his agent with full powers for the purpose of applying for patent, letters of patent, registered IPR, utility model, trade mark, service mark or other similar protection in the United Kingdom or any other part of the world as the Company may specify for any of the Inventions and execute all instruments and do all things necessary for vesting the said patents, letters of patent, registered, utility model, trade mark, service mark or other similar protection when obtained and all rights, title and interest to and in the same in the Company (or its nominee) absolutely and as sole beneficial owner or in such other person as the Company may require; provided that nothing herein shall prejudice the rights of the Executive as contained in sections 39 to 43 of the Patents Act 1977 as amended. TERMINATION BY RECONSTRUCTION OR AMALGAMATION 39) If before the expiration of this Agreement the employment of the Executive hereunder shall be terminated by reason of the liquidation of the Company for the purposes of amalgamation or reconstruction or as part of any arrangement for the amalgamation of the undertaking of the Company not involving liquidation and the Executive shall be offered employment with the amalgamated or reconstructed company on terms not less favourable than the terms of this Agreement the Executive shall have no claim against the Company in respect of the termination of his employment by the Company. TERMINATION OF DIRECTORSHIP 40) If during his employment hereunder the Executive shall cease (otherwise than by reason of death) to be a Director of the Company, his employment hereunder shall continue as if he was employed as a manager of the Company. EARLY TERMINATION 41) Notwithstanding anything in clauses 1.2, 1.3 or 12, the Company without prejudice to any remedy which it may have against the Executive for the breach or non-performance of any of the provisions of this Agreement may by notice in writing to the Executive forthwith determine this Agreement and the Executive shall have no claim for damages, payment in lieu of notice or otherwise against the Company in respect of such termination if the Executive shall: Handbook of Venture Capital Documentation Page 96 42) suffer his estates to be sequestrated or execute a trust deed for his creditors or make any provision or enter into any deed of arrangement with his creditors; or 43) become a patient as defined in the Mental Health (Scotland) Act 1984; or 44) be convicted of any criminal offence other than an offence which in the reasonable opinion of the Board does not affect his position as an employee of the Company under this Agreement (bearing in mind the nature of the duties he is engaged in under this Agreement and the capacity in which he is employed); or 45) commit any act of dishonesty whether relating to the Company, any of its employees or otherwise; or 46) be or become prohibited by law from being a company director; or 47) conduct himself in a manner amounting to serious misconduct, any conduct tending to bring the Company or himself into disrepute, serious or persistent neglect of his duties hereunder, or any serious breach of any of the conditions of this Agreement that is not capable of rectification or if he fails promptly to rectify that breach (if reasonably capable of rectification) after a request by the Board to do so. 48) Any delay or forbearance by the Company in exercising any such right of termination shall not constitute a waiver of it. EFFECT OF TERMINATION 49) Upon the termination of his employment hereunder for whatever reason the Executive shall deliver up to the Company all property belonging to the Company that is in his possession or under his control. 50) The expiration or determination of this Agreement howsoever arising shall not operate to affect such of the provisions hereof as are expressed to operate or have effect thereafter and shall be without prejudice to any other accrued rights or remedies of the parties. RESTRICTIVE COVENANTS 51) In this clause 15 (and wherever used elsewhere in this Agreement where the context so permits), the following expressions shall have the following meanings: 52) “Associated Company” means any other company which is for the time being or from time to time a holding company of or subsidiary of the Company or of any other holding company; 53) “Competing Business” means any business or activity or any part of any business or activity which is similar to and is, or seeks with the Executive‟s involvement to become, directly competitive within the Restricted Area with any business or activity carried on as at the Termination Date by the Company or by an Associated Company and with which business or activity the Executive had during the Relevant Period been personally involved in the course of his employment, having regard to the products of the Company; Handbook of Venture Capital Documentation Page 97 54) “Relevant Period” means the 12 month period ending with the Termination Date; 55) “Restricted Area” means Scotland; 56) “Restricted Period” means during the continuance of this Agreement and thereafter for a period of twelve months thereafter; 57) “Termination Date” means the date on which this Agreement shall determine irrespective of the cause or the manner. 58) Since the Executive has obtained and is likely to obtain in the course of his employment with the Company knowledge of confidential information regarding the Company and any Associated Company, he hereby agrees, without prejudice to any duty or restriction implied by law, to be bound by the following restrictions: 59) during the Restricted Period, he shall not, without the prior written consent of the Company, be directly or indirectly engaged, interested or concerned in any business with a Competing Business (subject always to the Company continuing to pay the Executive monthly in arrears a sum equivalent to the Executive‟s monthly gross salary (excluding bonuses and benefits-in-kind) as was current prior to the Termination Date during such time as the foregoing restriction shall be enforced by the Company, it being understood that the Company may elect to waive such restriction against the Executive at any time upon giving at least 2 weeks‟ prior written notice to that effect); 60) during the Restricted Period, he shall not, without the prior written consent of the Company, solicit or entice away or endeavour to solicit or entice away from the Company or from an Associated Company any person who had been, at any time during the Relevant Period , a director or senior or key employee of the Company or an Associated Company; 61) during the Restricted Period, he shall not, without the prior written consent of the Company, seek to employ in any capacity or offer employment in any capacity to or enter into or offer to enter into partnership with any person in relation to whom clause 15.2.2 is applicable; 62) during the Restricted Period, he shall not act in any manner or make any public statements which are calculated to be prejudicial to the interests of the Company or an Associated Company. 63) The Executive hereby acknowledges and agrees that each of paragraphs 15.2.1 to 15.2.4 constitutes an entirely separate and independent restriction on him and that the duration, extent and application of each of the restrictions are not greater than is necessary for the legitimate protection of the interests of the Company and its Associated Companies from time to time, unless determined otherwise by a court of competent jurisdiction. 64) The restrictions set out in clause 15.2 shall apply to any action taken by the Executive whether as agent, representative, partner, principal, employee, joint venturer or consultant or as a director of any company and/or by any spouse of the Executive and/or by any company controlled by him or any such spouse. OTHER TERMS AND CONDITIONS Handbook of Venture Capital Documentation Page 98 65) The following particulars are given in compliance with the requirements of the Employment Rights Act 1996: 66) The Executive shall be required to work such reasonable hours as may be necessary so as properly to fulfil his duties hereunder to the satisfaction of the Board. 67) If the Executive is dissatisfied with any disciplinary decision or if he has any grievance relating to his employment hereunder he should refer such disciplinary decision or grievance to the Board and the reference will be dealt with by discussion and decision of a Board Meeting which decision shall be final. 68) No Contracting-Out Certificate pursuant to the provisions of the Pensions Act 1993 is in force in respect of the Executive's employment hereunder. 69) There are no collective agreements which affect the terms and conditions of the Executive's employment. NOTICES 70) Any notice to be given hereunder shall be in writing. Notice to the Executive shall be sufficiently served by being delivered personally to him or by being sent by recorded delivery addressed to him at his usual or last known place of abode. Notice to the Company shall be sufficiently served by being delivered to the Company Secretary or a Director of the Company (other than the Executive) or by being sent by recorded delivery to the registered office of the Company. Any notice, if delivered by hand shall be deemed to have been received immediately (if delivered during business hours on a business day) or on the next business day (otherwise), and, if so posted by recorded delivery, shall be deemed served upon the third business day following that on which it was so posted. 71) For the purposes of clause 17.1, "business hours" means between 9 am and 5 p.m. and "business day" means the days between Monday and Friday inclusive on which banks in Scotland are open for business. DEFINITIONS 72) In this Agreement: 73) The "Board" shall mean the Board of Directors of the Company. 74) Clause headings are inserted for convenience only and shall not affect the construction of this Agreement. 75) Unless the context otherwise requires any references in this Agreement to: 76) a "person" shall include any individual, company, corporation, firm, partnership, joint venture, association, organisation or trust (in each case whether or not having separate legal personality) and references to any of the same shall include a reference to the others; 77) "writing" or "written" shall include any means of visible reproduction; 78) words denoting the singular shall include the plural and vice versa; Handbook of Venture Capital Documentation Page 99 79) statutory provisions shall be construed as references to those provisions as respectively amended or re-enacted or as their application is modified by other provisions (whether before or after the date hereof) from time to time and shall include any provisions of which they are re-enactments (whether with or without modification). GOVERNING LAW 80) The construction, interpretation and performance of this Agreement shall be governed by the laws of Scotland, and the parties hereto agree to submit to the non-exclusive jurisdiction of the Scottish courts. SUBSCRIBED for and on behalf of NEW CO Ltd at on 2001 by …………………………………… before this witness Director Witness......................................................... . Full name...................................................… Address.......................................................… SUBSCRIBED for and on behalf of (person name) at on 2001 by …………………………………… before this witness Director Witness......................................................... . Full name...................................................… Address.......................................................… (date) Service Agreement between New Co and (name) Solicitor Co (name and Place) Handbook of Venture Capital Documentation Page 100 Document Number 18 Document title Salary schedule Purpose of document As with document 16, to lay down and agree rules for outgoings. Example of use Key sensitivities To reconcile motivation with New Co cashflow requirements. Com pany Nam e Schedule of Re muneration Date Potential Potential Salar y NI Pension Car Fuel PHI Medical Total Bonus Total £ £ £ £ £ £ £ £ £ £ A Director 0 0 Another Director 0 0 Total Excutives 0 0 0 0 0 0 0 0 0 0 Chairman 0 0 Non exec 0 0 Non exec 0 0 Non exec 0 0 Total non exe cs 0 0 0 Gr and Total 0 0 0 0 0 0 0 0 0 0 Notes Only executives are included in the salary cap DOCUMENT NUMBER 19 DOCUMENT TITLE EMPLOYEE HANDBOOK PURPOSE OF TO ENSURE THAT (PARTICULARLY START-UPS) COMPLY DOCUMENT WITH LEGAL AND ACCEPTABLE STANDARDS OF EMPLOYMENT EXAMPLE OF USE STANDARD KEY SENSITIVITIES MIGRATING FROM A START-UP GROUP TO A COMPANY RECRUITING ITS FIRST (SAY) TWO OR THREE OUTSIDERS CAN BE THE BIGGEST SINGLE LEAP A COMPANY MAKES. TACIT UNDERSTANDINGS AND SHARED VISIONS BEGIN TO NEED ENCAPSULATING IN FORMAL RULES, WITHOUT INTRODUCING BARRIERS TO INNOVATION OR TO FLEXIBILITY. New Co Ltd . Handbook of Venture Capital Documentation Page 101 Employee Handbook 1. PREAMBLE The Directors of New Co Ltd (referred to in this handbook as “New Co” or “the Company”) hope that you will find the experience of working for the Company fulfilling and rewarding. We strongly believe that if you look forward to coming to work every day, it is a win-win situation for both you and New Co. If we are to make this Company the success that we hope for then we need every single person not only to pull their weight but to enjoy a sense of enthusiasm and excitement and to be continually alert to opportunities for doing things better. The purpose of this handbook is to explain a number of the aspects of your work with New Co - how we do things, what you can expect of the company and what New Co expects of you. In a formal sense therefore the contents of this handbook are, to the extent applicable, terms of your contract of employment and you are employed only on this understanding; any variation of the contents (by issue of a new edition of the handbook or replacement pages) therefore constitutes notice by New Co of a variation in the terms of your employment. 2. CODE OF CONDUCT The following code of conduct has been adopted by New Co to summarise the principles which we hope will govern the way in which we do business. It is the duty of all staff to uphold this code and to conduct themselves at all times in a manner which brings credit to the company: As a professional organisation New Co will endeavour always to act in a proper manner in its relationships with customers, employees, suppliers, competitors and with the general public by making the following commitments: 2.1 Customers To express the terms on which we do business clearly and precisely and to fulfil commitments in good faith. To ensure that customers are clearly informed concerning: a. The nature and specification of the product or service which they are buying, b. The price which they will be required to pay. c. Delivery timescales d. Any inputs which are required from the customer Handbook of Venture Capital Documentation Page 102 To provide proper security for customers' confidential information. 2.2 Employees To provide good and safe working conditions, scope for job satisfaction and opportunities for professional development To ensure that every employee understands what is expected of them. To discuss performance and prospects with each employee on a regular basis. To work continuously to improve employees' skills and technical competence. To encourage professional behaviour and a high standard of service to customers. 2.3 Competitors 1. To recognise that disparagement of competitors is unprofessional. 2. To refrain from recruiting competitors' employees for the purpose of obtaining trade secrets. 3. HEALTH & SAFETY POLICY Our policy is to provide and maintain safe and healthy working conditions, equipment and systems of work for all our employees, and to provide such information, training and supervision as they need for this purpose. We also accept our responsibility for the Health and Safety of other people who may be affected by our activities. All employees have the responsibility to co-operate with management in implementing this policy and to take reasonable care of themselves and others. This means, among other things, keeping working areas tidy and gangways clear, operating electrical equipment in a safe manner, taking care not to lift heavy objects without assistance and generally being alert to potential hazards. 3.1 Display Screen Equipment The company recognises that it is important that employees who need them are properly equipped with spectacles for use with VDUs. In each calendar year, the company will therefore pay for one professional eyesight test for each employee. You are Handbook of Venture Capital Documentation Page 103 strongly advised to take advantage of this and to find out the appropriate arrangements you should ask your manager. If a test results in your being advised to wear spectacles for working with a VDU, and you do not otherwise require to wear spectacles or the spectacles required for VDU work are different from the spectacles which you normally wear, then New Co will pay for the lenses and cheapest available frames. Should you wish to have more expensive frames, then you will be required to pay the additional cost. 3.2 Accidents In the event of an accident, injury or illness, immediate first aid can be administered from the First Aid Box; however, if you are in doubt you should seek professional medical help or consult a qualified First Aider. Please ensure that you are familiar with the location of the First Aid Box and the names of trained and qualified First Aiders. (The Company does not guarantee that a First Aider will always be available.) The details of all accidents must be recorded in the incident book. 3.3 Smoking New Co does not permit smoking on any of its premises 3.4 Visitors If you have visitors, you should advise them to report to the Administration Office upon arrival. Whenever practical no visitor should be left unaccompanied. In the event of a Fire Alarm or other emergency make sure that you accompany out of the building all visitors which you have. All visitors should be encouraged to abide by New Co‟s in – house rules, including the no smoking rule. 4. INDUCTION The introduction of new employees into New Co is assisted by our induction procedure, the object of which is to introduce new employees to the faces, products and processes that make up New Co as an organisation. On your first day, many of the items in this handbook will be explained to you and, where possible, you will meet certain key staff . 5. HOURS AND PAY Handbook of Venture Capital Documentation Page 104 In common with many similar companies, New Co expects that its employees will be highly committed, professional individuals who will not require to be the subject of detailed policing to ensure that they work set hours. Nevertheless, as general guidance to the minimum that is expected of you: Your normal working hours are Monday to Friday 0900 - 1700 You may take a lunch break of 30 minutes between 1200 and 1400. In order to accommodate individual circumstances, you may arrive for your work at any time up to 0930 and you may take off up to 90 minutes for lunch. You will however be expected to make up the deficit by working after normal finishing time on the same day. Please note that this is an informal concession and not a flexi-time system. In particular, surpluses and /or deficits may not be carried over to another day and a deficit arising from a late start may not be „repaid‟ by reducing your lunch break to less than 30 minutes. If you require additional flexibility for any reason, please discuss the matter with your manager. (In general it is the company‟s policy to be flexible in accommodating employees requirements for short periods of absence for appointments such as attending the dentist, and conversely you are expected to try to schedule such appointments so as to minimise disruption of your working day. If the time off for this purpose amounts to half a day or more in any one day then you will be expected to take it as holiday.) 5.1 Overtime New Co does not normally make any payment in respect of additional hours worked outside normal working hours. If however it has been specifically agreed in writing that overtime will be paid, the following conditions apply: Overtime is calculated to the nearest half hour each day. Overtime will be paid only when it has been specifically authorised in advance by a director. Overtime will be paid at a rate per hour of 1/1350 of your annual salary. 5.2 Salary Payments Basic salaries (net of PAYE and NI which are deducted at source) are paid monthly in arrears directly into your bank account. Handbook of Venture Capital Documentation Page 105 (Because details of overtime, sales commission and the like are not generally available at the time that net salaries are computed, payments in respect of these items are generally carried forward to the following month.) Payment will be made from the Company‟s bank account on or before the 24th of each month and this should ensure that payments will reach employees accounts with clearing banks by the last day of the month. Funds may take longer to reach accounts which are held with a building society or non-clearing bank. 6. HOLIDAYS You are entitled to take holidays (including public holidays) totalling 32 days during each year of employment. Scheduling of holidays is by mutual agreement between you and your manager, but they must be agreed in advance. The holiday year is from 1 January to 31 December with holiday entitlement, rounded to the nearest whole day, accruing on completion of each month of service. You are encouraged to take your holiday entitlement within the current calendar year, the onus being on you to ensure that it is taken. If, for reasons beyond your immediate control, you cannot take all of your holiday entitlement, agreement should be sought from your manager on the number of days that may be carried over. The maximum entitlement which may be carried over from one year to the next is 15 days. If you take holidays in excess of your accrued entitlement, these will normally be set off against future entitlement to paid holidays, or, on termination of your employment, these will be set off against salary or other money due to you. 7. SICKNESS. For purposes of Statutory Sick Pay (SSP) your qualifying days are Monday to Friday. If you are absent from work due to sickness, disablement or injury: 1. During the first six months from commencement of your employment you will be paid your full salary for up to 10 days absence 2. Thereafter you will be paid your full salary for up to 20 days absence in any period of 12 months and 50% of your salary for up to a further 20 days in the same period. Handbook of Venture Capital Documentation Page 106 3. New Co is not obliged to pay your salary in respect of any additional absence. (For this purpose "full salary" includes any Statutory Sick Pay (SSP) to which you may be entitled (and which New Co will under normal circumstances pay to you and reclaim from the DSS). If you are paid 50% of your salary or less you will be entitled in addition to any SSP receivable.) If you are absent due to sickness you must follow the following procedure: First* Working Day of Sickness Notify New Co by telephone Fourth* Day of Sickness and every Notify New Co again by fourth day thereafter. telephone Eighth* Day of Sickness You must obtain a medical certificate to cover the eighth day onwards and supply this and any subsequent medical certificates to your manager *The first day of sickness must be a working day but subsequent days include non-working days (e.g. if your first day of sickness is a Friday, then your fourth day is the following Monday). New Co reserves the right to withhold salary payments if it considers that there is insufficient evidence of sickness or injury. 8. COMPASSIONATE LEAVE There are no fixed rules concerning compassionate leave; however the Company‟s general policy is to be sympathetic and flexible in cases of bereavement, serious family illness and the like. If the situation arises you should discuss the matter with your manager. Please note that time off to look after children who are off school due to illness is not considered to be compassionate leave but must be taken as part of your holiday entitlement. 9. EXAMINATION LEAVE Company policy is that employees will be given time off for revising and for sitting exams which are relevant to their employment with New Co. Granting of such leave is at the company’s Handbook of Venture Capital Documentation Page 107 discretion but the general rule is that one day of revision leave is permitted for each paper being sat. If you are sitting exams, please discuss the matter with your manager. 10.PENSION & SOCIAL SECURITY New Co does not operate a company pension scheme and there is therefore no contracting-out certificate under the Social Security Pensions Act, 1975 in respect of your employment by New Co. It is the intention of New Co to make arrangements as required by legislation for employees to be able to contribute to a stakeholder pension scheme. When these arrangements have been made, the details will be advised to you. 11.EXPENSES If you have to travel and/or stay away from home in the course of your work you will be reimbursed for any additional reasonable expenses which you incur as a result. The principle is that you should be able to subsist to a reasonable standard. No expenses may be incurred without the prior approval of your manager. If you use a car on company business, you may claim mileage at the following rates. Normal parking and toll charges will be reimbursed, but not penalties or fines related to parking or driving offences. If you have expenses to claim you should do so by entering the items on your weekly claim form. Ensure that receipts in respect of all amounts claimed are stapled to the back of the claim forms. If you use If you are If you your own car in receipt purchase fuel and you are of a car for a company not in allowance car which is receipt of a and use your also available car own car for your allowance private use For the first 100 miles 38 cents per in each day mile 19 cents per 12 cents per mile Additional miles 19 cents mile per mile 12.MOBILE PHONES Handbook of Venture Capital Documentation Page 108 The company has a number of mobile phones which are available for use by staff for company business only. It is important that you observe this restriction and do not use a company mobile phone for personal purposes. 13.GENERAL DUTIES OF EMPLOYEES As an employee of New Co you are expected to carry out to the best of your ability the task designated to you by your manager. You are also expected to devote all of your working time and energy to the business of New Co and you may not be a director, partner or employee of any other business or engage in any other profession, trade or business without the consent of New Co. You must at all times protect New Co and its customers' property and, except in the performance of your duties, you may not remove from the company's or customers' premises, nor employ, lend, give or otherwise dispose of any drawings, designs, software (including any copies or listings) or any other property not belonging to you. 14.RESTRICTIONS You may not, for a period of one year from the date of termination of your employment for any reason whatever: 81) Directly or indirectly solicit or endeavour to entice away, offer employment to, employ or cause to be employed any person who at any time during the twelve months prior to such termination is or was an employee of New Co. 82) Induce or endeavour to induce any person with whom New Co has done business at any time within twelve months prior to the date of termination, to remove their business from New Co. If any of the foregoing restrictions is held for any reason not to be valid or enforceable as going beyond what is reasonable for the protection of the interests of New Co, but would be valid if part of the wording were deleted or its extent reduced or modified, then such restrictions shall apply with such modifications or variations as may be necessary to make them enforceable, and any such modification or variation shall not thereby affect the validity of any of the other restrictions. 15.INVENTIONS Subject to your statutory rights under the (UK) Patents Act 1977 and the (UK) Copyright, Designs and Patents Act 1988, and any other applicable Act, any invention, discovery, process, design, Handbook of Venture Capital Documentation Page 109 plan, computer program or other intellectual property whatever, and any modification, enhancement or development of any existing such thing (hereinafter referred to as "Inventions") made or discovered by you (whether alone or with others) while in the employment of New Coin connection with or in any way affecting or relating to the business of New Co or capable of being used or adapted for use therein shall forthwith be disclosed to New Co and shall belong to and be the absolute property of New Co. If so required by New Co(whether before or after the termination of your employment) you will, at New Co‟ request and expense, apply or join in applying for letters, patent registration or other appropriate protection in the United Kingdom, for any Inventions, and execute all documents and do all other things necessary, expedient or desirable to vest such letters, patent registered rights or other protection when obtained, and all right, title and interest in and to the same, in New Co as sole beneficial owner, and for this purpose shall, at New Co expense, take or defend any proceedings to procure or defend such application, registration or protection. You hereby irrevocably appoint New Co to be your attorney in your name and on your behalf to execute any such document or do any such thing, and generally to use your name for the purpose of giving to New Co the full benefit of the provisions of this Clause. CONFIDENTIALITY Save as specifically authorised by New Co, or as required in the performance of your duties hereunder, you shall at all times (both during and after termination of your employment) maintain absolute confidentiality in respect of all trade secrets, secret or confidential operations, know how, processes or dealings, inventions, discoveries, designs, plans, computer programs and other intellectual property whatever and all information concerning the organisation, business finances, transactions and affairs, of New Co which have come to your knowledge during your employment, and shall not disclose any of same to any other person, firm or authority, or use or attempt to use any such information in any manner which may injure or cause loss or may be calculated to injure or cause loss directly or indirectly to New Co. Handbook of Venture Capital Documentation Page 110 APPRAISALS Your manager will invite you to attend a formal appraisal at least once in each calendar year. At this meeting, issues of performance, job content, development and future training needs will be discussed. The appraisal scheme is designed to facilitate the exchange of views and perceptions from both parties; as such both you and your manager should feel free to discuss anything that they see as influencing the development of you, the team in which you work, or the company as a whole. The appraisal should be treated as confidential and is not related, in any way, to issues of pay or promotion. GRIEVANCE PROCEDURE New Co recognises that all employees who feel that they have a grievance concerning anything to do with their employment, should have the means of having their grievance fully examined and, whenever possible, remedied. In such a case you should do the following: 4. Discuss the matter in the first instance with your manager. 5. If the matter is not resolved in this way you should write a letter describing the situation and addressed to the Company Secretary. Once a grievance has been notified in writing to the Company Secretary you will receive a reply within one week. UNSATISFACTORY PERFORMANCE OR CONDUCT If you are failing to meet the requirements of your employment, whether relating to performance or conduct, then your manager will formally discuss the matter with you and explore possible ways of improvement. Following this, with the help and encouragement of your manager, you will have the opportunity to raise the standards of your performance or conduct. If the problem persists, your manager may issue a written warning which will detail :- Why the warning has been given. What improvements in performance or conduct are required. The timescales and monitoring process involved. If the required improvement is achieved, you will be informed and the warning will be deleted from all records. Handbook of Venture Capital Documentation Page 111 If adequate improvement is not achieved either a further warning may be issued or your manager may recommend dismissal or other disciplinary action. In the event of gross misconduct or dishonesty, you may be dismissed without notice or subject to other immediate disciplinary action. If you are subject to disciplinary action (including dismissal), you will receive a letter from the company which will detail:- An explanation of the penalty imposed The reasons for the penalty. If you think that a penalty has been unfairly imposed, you should follow the Grievance Procedure set out above. At any point during a disciplinary procedure, you have the right to be accompanied by a fellow employee of your choice. TERMINATION Except in the event of serious misconduct when you may be dismissed without notice, New Co may terminate your employment by giving one month's notice in writing. If you wish to leave New Co employment, you are required to give one month's notice in writing. If at the date when you leave you have taken either more or less holiday than the entitlement which you have accrued, your final salary payment will be adjusted for the difference. TRAINING Training required for developing individuals and meeting the needs of the business will be reviewed every year as part of the appraisal system. Individuals identified as requiring additional training will be invited to undertake it. Training can be in-house or external depending on availability of courses. Employees should be willing to undertake off-site training when required. SHARE OPTIONS Handbook of Venture Capital Documentation Page 112 If you have been awarded share options, you will be advised by letter signed by a director: 3. The date of the award of the options (the “Award Date”) 4. The number of options 5. The Option Price 6. Any special conditions relating to your options. The options will then be subject to the following rules: Subject to any special conditions which may be specified at the time of award of the option and to the rules below, each option entitles the holder to subscribe, at the Option Price for the issue of a new, fully paid ordinary share of New Co Ltd . Such subscription constitutes “exercise” of an option. Except as required for the purpose of exercise following an option holder‟s death, an option is personal to the person to whom it has been awarded and may not be transferred to any other person Any option which has not lapsed may be exercised following the earliest of the following events: the second anniversary of the Award Date the death of the Option Holder the Holder ceasing by reason of injury, disability, redundancy or retirement to be a director or employee of New Co Ltd or any of its subsidiaries the acquisition by any person of control of New Co, the term “control” having the same meaning as in Section 840 of ICTA 1988.* An option shall lapse on the earliest of the following events: the tenth anniversary of the Award Date. the first anniversary of the Option Holder‟s death three months following the Option Holder ceasing, other than by reason of his death, to be a director or employee of New Co Ltd or any of its subsidiaries. six months after any person who has acquired control of New Co has given to the Option Holder valid written notice of such lapse.* Handbook of Venture Capital Documentation Page 113 In the event of any variation of the share capital of the Company by way of capitalisation or rights issue, consolidation, subdivision or reduction of capital or otherwise, the number of Options held by each Option Holder and the Option Price for each of those Options shall be adjusted in such manner as the company‟s auditor shall confirm in writing to be fair and reasonable. * The purpose of these two rules is to ensure that if the Company is taken over by another company then Option Holders will have the opportunity either to exercise their options (which should then allow them to participate with other shareholders in the terms of the takeover) or to reach an agreement with the acquiring company for their options in New Co to be replaced by options in the company taking over. It is the Company‟s intention to ensure that as far as possible options granted in accordance with the above rules will qualify for favourable tax treatment under the UK regulations governing Enterprise Management Incentives (EMI). However the Company does not accept any responsibility in this regard and will not be liable for any losses suffered by Option Holders as a result of taxation levied in relation to the award, holding or exercise of Options. Handbook of Venture Capital Documentation Page 114 DOCUMENT NUMBER 20 DOCUMENT TITLE LICENSING AGREEMENT PURPOSE OF To agree a license to use IPR owned by others DOCUMENT EXAMPLE OF USE In this example two universities are licensing IPR developed by their employees, for commercial exploitation. KEY SENSITIVITIES Valuing IPR LICENCE AGREEMENT Between THE UNIVERSITY XXXXX XXXXXX UNIVERSITY Licensee Co Limited (a company formerly known as xxxxxx) and incorporated in England and Wales (Company Number xxxxxx) and whose registered office is at (place) (hereinafter together referred to as “the Joint Owners”) and NEW CO LIMITED Incorporated under the Companies Acts (Scottish Company Number xxxxxx) and whose registered office is at (place (hereinafter referred to as “the Licensee”) WHEREAS: 1. The Joint Owners collaborated as part of a joint development agreement under the Secretary of State for Trade and Industry LINK Sensors and Sensor Systems for Industrial Applications research Programme. 2. As a result of said collaboration the Joint Owners have developed and are the beneficial owners of a substantial body of valuable Technical Information (as hereinafter defined). Handbook of Venture Capital Documentation Page 115 3. The Joint Owners are the owners of the Patent Rights (as hereinafter defined). 4. The Joint Owners and the Licensee wish to enter into an Agreement in terms of which: (a) the Licensee will obtain certain exclusive rights within the Field of Use to use the Patent Rights in order to manufacture and sell Products (as hereinafter defined) incorporating the Technical Information; (b) the Licensee might purchase further technical support in order to facilitate the development of the Products. 5. The parties have decided to enter into the present Agreement to formalise the above:- NOW THEREFORE IT IS HEREBY AGREED AS FOLLOWS:- 1. Definitions In this Agreement the following terms shall have the following meanings unless the context otherwise requires: “Field of Use” means the measurement of layer thickness by means of fluorescence in the technical field of application or product market consisting of the coating of plastic films and paper in the hot stamping foils market; "Improvements" means all improvements, modifications or adaptations to any part of the Technical Information which might reasonably be of commercial interest to either party in the agreement, manufacture or supply of the Products and which may be made or acquired by either party during the Improvements Period "Improvements Period" Period during which the licence is in force as set out Clause 2.1 "Gross Profit" means the total value of sales of the Products less the manufacturing costs incurred by the Licensee in producing the Products sold as the said costs are agreed by the Joint Owners and the Licensee or, failing Agreement, Handbook of Venture Capital Documentation Page 116 as determined by arbitration pursuant to Clause 13 of this Agreement, declaring however that for sales made during the two year period immediately following the Commencement Date the manufacturing costs shall be fixed at Fifteen Thousand Pounds (£15,00) for each Product sold. "Patent Rights" means (i) the patents and applications, short particulars whereof are set out in Part 1 of the Schedule hereto; (ii) all patent applications that may hereafter be filed in the Territory by or on behalf of the Joint Owners which either are based on or claim priority from any of the foregoing patents and applications or which are in respect of any Improvements to which either party is exclusively entitled; and (iii) all patents which may be granted pursuant to any of the foregoing patent applications; "Products" means any machinery which utilises an (details) which falls in whole or in part within the scope of any of the claims of the Patent Rights and/or which incorporates any Technical Information, for the avoidance of doubt, including any Improvements made in terms of this Agreement. "Schedule" means the Schedule annexed and subscribed as relative hereto; "Technical Information" means all know-how, experience, drawings, circuit diagrams, computer programs and all other technical information relating to the Products and which might reasonably be of commercial interest to either party in the manufacture or supply of the Products ; "Territory" means all or any countries or parts of the world. Handbook of Venture Capital Documentation Page 117 2. Duration 2.1 This Agreement shall commence on [ ] 2000 ("the Commencement Date") and shall continue in full force and effect for a period of 10 (ten) years from the Commencement Date unless earlier terminated in accordance with the provisions of this Agreement. 3. Technical Information 3.1 The Joint Owners warrant that all Technical Information disclosed or to be disclosed to the Licensee hereunder is or will be, to the best of the Joint Owners knowledge and belief, accurate, but the Joint Owners shall be under no further liability to the Licensee in respect of the Technical Information or of the manufacture, use, sale or other disposition of the Products. 3.2 The Licensee shall be exclusively responsible and for incorporating any modifications or developments thereto that might be necessary and for all Products sold or supplied by the Licensee and accordingly the Licensee shall indemnify the Joint Owners in respect of all costs, damages and expenses incurred as a result of any claims by third parties against the Joint Owners arising in any way out of the use of any of the Technical Information by the Licensee. 3.3 The Licensee shall be exclusively responsible for the technical and commercial operation of the Products and for incorporating any modifications or developments thereto that might be necessary and for all Products sold or supplied by the Licensee and accordingly the Licensee shall indemnify the Joint Owners in respect of all costs, damages and expenses incurred as a result of any claims by third parties in delict or otherwise against the Joint Owners arising in any way out of the use of any of the Technical Information by the Licensee. 4. Grant of Rights 4.1 The Joint Owners hereby grant to the Licensee an exclusive licence under the Patent Rights to use, manufacture or otherwise deal in the Products in the Field of Use anywhere in the Territory. 4.2 The Joint Owners hereby grant to the Licensee a non- exclusive licence to use the Technical Information in order to assist with the development, manufacture, use or otherwise deal with the Products in the Field of Use in the Territory. Handbook of Venture Capital Documentation Page 118 Licensee shall have no right to grant sub-licences under this Agreement, but this shall not prevent the Licensee from sub-contracting aspects of some, but not all, of the manufacture of Products, PROVIDED THAT in so doing the Licensee ensures that any such sub-contractors agree to conditions of confidentiality no less strict than those contained within this Agreement. 4.4 No further right or licence is granted to the Licensee save as set out expressly in this clause 4. 4.5 The Joint Owners have no obligation under this Agreement to provide the Licensee with any Technical Information or know- how of any nature except as expressly set out in this Agreement. 4.6 The Licensee shall have no right hereunder to manufacture, use or sell the Products or to use the Patent Rights otherwise than as expressly licensed to the Licensee hereby. 4.7 In the event that the Licensee during the continuance of this Agreement or within a period of [ ] years from the date of its termination for any reason or until expiry of any relevant Patent Rights (whichever is the sooner) is directly or indirectly concerned in the manufacture, distribution, sale or other supply in any part of the Territory of any manufactured goods which by reason of their properties and performance are commercially competitive with any Products, the Joint Owners shall be entitled to convert this the licence granted in terms of this Agreement from exclusive to non-exclusive. 4.8 The Joint Owners shall be entitled to exploit the Patent Rights outside the Field of Use. Subject to obligations of confidentiality the Joint Owners shall advise the Licensee in the event that an approach is made by a third party with a view to exploiting outwith the Field of Use. The Joint Owners shall discuss any such approaches in good faith with the Licensee, who shall be offered the opportunity to negotiate a further licence with the Joint Owners to exploit outside the Field of Use. The Joint Owners shall be under no further obligation in this regard. 5. Payment 5.1 Subject to Clause 6.4 below, the Licensee shall pay to EACH of the parties royalty of five per cent (5%)of the Handbook of Venture Capital Documentation Page 119 Gross Profit of all Products (or any part thereof) sold or otherwise supplied for money or money's worth by the Licensee. 5.2 If any Products are incorporated in any other equipment or apparatus sold by the Licensee hereunder at a price which is included in the price for the other equipment or apparatus, the Gross Profit for the purpose of calculating royalties due hereunder shall be that proportion of the Gross Profit of that other equipment or apparatus which is fairly attributable to such Products comparing the manufacturing cost of the other equipment or apparatus to that of the Products as components thereof. 5.3 For the purposes of this Clause 5, Products are sold when invoiced. 5.4 Payments due under Clause 5.1 shall be made within 60 (sixty) days of the end of each calendar quarter in respect of royalties accruing on Products invoiced in that calendar quarter failing which interest shall be payable thereon at the rate of five per centum above the Base Lending Rate of the Bank Co plc from time to time or such other rate as is equivalent thereto. 5.5 All sums due under this Agreement: 5.5.1 are exclusive of any Value Added Tax which shall be payable in addition on the rendering by the Joint Owners of any appropriate Value Added Tax invoice; 5.5.2 shall be made in Pounds Sterling to the credit of bank accounts to be agreed in writing by the Joint Owners. 5.5.3 shall be made in full without deduction of taxes, charges and other duties that may be imposed except in so far as any such deduction may be credited in full by the Joint Owners against the Joint Owners‟ own tax liabilities. The parties agree to co-operate in all respects necessary to take advantage of such double taxation agreements as may be available. 5.6 If in any calendar year the amount of any royalty paid to each of the Joint Owners under this Clause shall be less than the amount paid by each of the Joint Owners pursuant to their obligations to maintain the patents under Clause 10.1, the Licensee shall forthwith on demand pay to the Joint Owners such further amount as is necessary to ensure that the total amount paid by Licensee under this Clause (being royalties and any balance due) in such calendar year is not less than the amount payable by the Joint Owners under said Clause 10.1. 6. Records and Reports Handbook of Venture Capital Documentation Page 120 6.1 The Licensee agrees to keep true and accurate records and books of account containing all data necessary for the determination of royalties payable under Clause 5.1 which records and books of account shall upon reasonable notice of the Joint Owners be open during business hours for inspection by the Joint Owners or their duly authorised agent for the purpose of verifying the accuracy of the Licensee's reports hereunder. The Joint Owners or their duly authorised agent may take copies of the records and books of account but shall not disclose to any third party any information relating to the business or affairs of the Licensee other than such information as properly should have been contained in any statement required to be furnished by the Licensee to the Joint Owners. 6.2 The Licensee shall submit to the Joint Owners within 30 days of the end of each calendar quarter a statement setting forth with respect to the operations of the Licensee hereunder during that period the quantity of Products made, used or sold and the Gross Profit of Products. 6.3 The Joint Owners agree to maintain as confidential, all financial information received with respect to the Licensee's operations pursuant to the foregoing Clauses 6.1 and 6.2. 7. Confidentiality 7.1 Each party agrees to maintain as confidential all Technical Information obtained from the others, both pursuant to this Agreement, and prior to and in contemplation of it and all other information that it may acquire from the other in the course of this Agreement, to respect the other's proprietary rights therein, to use the same exclusively for the purposes of this Agreement, and to disclose the same only to those of its employees and sub-licensees pursuant to this Agreement (if any) to whom and to the extent that such disclosure is reasonably necessary for the purpose of this Agreement. 7.2 The foregoing obligations of Clause 7.1 above shall not apply to Technical Information or other information which: (1) prior to receipt thereof from one party was in the possession of the other and at its free disposal; (2) is subsequently disclosed to the recipient party without any obligations of confidence by a third party who has not derived it directly or indirectly from one of the other parties; Handbook of Venture Capital Documentation Page 121 (3) is or becomes generally available to the public in printed publications in general circulation through no act or default of the recipient party or its agents or employees. 7.3 Notwithstanding the foregoing provisions, the parties shall be entitled to disclose Technical Information of the other to actual or potential customers for Products in so far as such disclosure is reasonably necessary to promote the sale or use of Products. 7.4 Each party shall procure that all its employees who have access to any information of the other to which the obligations of Clause 7.1 apply, shall be made aware of and subject to these obligations and shall further procure that so far as is reasonably practicable all of such employees and sub-licensees shall enter into written undertakings in favour of the other party to this end in a form previously approved by the Joint Owners. 8. Improvements 8.1 Each party shall forthwith disclose to the other in confidence and in such detail as that other may reasonably require all Improvements that it may develop or acquire during the Improvements Period except in so far as such disclosure would disclose information derived from and subject to confidentiality obligations in favour of a third party. 8.2 Improvements that the Joint Owners are due to disclose to the Licensee under Clause 8.1 above shall be deemed to be part of the Technical Information for the purposes of the rights granted to the Licensee under Clause 2 hereof. 8.3 Improvements arising from work carried out jointly shall belong to the parties equally unless they shall otherwise agree. 8.4 The Licensee acknowledges and agrees to further contract with the Joint Owners on terms to be agreed (which shall include remuneration to the Joint Owners) between the parties for the Joint Owners to provide on-going consultancy services for the further development of Technical Information and Improvements aimed at improving the Products . 9. Performance 9.1 During the continuance of this Agreement the Licensee shall: 9.1.1use its best endeavours to promote the distribution and sale of Products in the Field of Use in the Territory as widely as its resources reasonably permit Handbook of Venture Capital Documentation Page 122 and will make available all necessary selling and manufacturing facilities to meet all reasonable demands for Products in the Field of Use throughout the Territory. The Licensee shall seek to maximise such demand, consistent only with the Licensee obtaining a reasonable rate of return on its assets employed in making and selling Products; 9.1.2ensure that all Products supplied by the Licensee meet all such reasonable specifications as the Joint Owners may from time to time apply thereto and satisfy in performance quality construction and use the reasonable requirements of the Joint Owners and shall upon reasonable notice from the Joint Owners give the Joint Owners or their authorised representative(s) free access at any reasonable time to the premises of the Licensee for the purpose of ensuring that the Licensee is observing these obligations; 9.1.3ensure that all literature prepared by the Licensee and relating to Products bears an acknowledgement to the effect that they are subject to a licence from the Joint Owners, and attach to all Products a label quoting relevant patent numbers and stating that such Products are made under licence from the Joint Owners; 9.1.4include in the terms and conditions of sale or other supply of the Products a guarantee to the effect that the Licensee will during at least the period of 12 months from the date of such sale or supply replace at its own expense and free of charge any Products supplied by it that are defective by reason of faulty manufacture or through inadequate workmanship or materials; 9.1.5provide adequate servicing facilities for any Products manufactured and/or supplied by the Licensee; 11.1.6not purport to be acting as an agent of the Joint Owners and specifically not give any indication that it is acting otherwise than as principal and in advertising or selling Products not make any representation or give any warranty on behalf of the Joint Owners. 10. Patents 10.1 As from the Commencement Date and subject to the provisions of Clause 5.6 the Joint Owners shall at their own cost (such costs to be borne equally by each of the Joint Owners) diligently prosecute to grant all subsisting patent applications within the Patent Rights in the name of the Handbook of Venture Capital Documentation Page 123 Joint Owners so as to secure the broadest monopoly reasonably obtainable consistent with avoiding serious prejudice to the validity of such granted patents and shall maintain all patents within the Patent Rights in force for the full terms thereof. 10.2 In the event of any infringement by a third party of any of the Patent Rights in the Territory on such a scale as to affect prejudicially the Licensee's business in the Products to a substantial extent, the Licensee will take all legitimate steps to halt such infringement. Subject to receiving advice from experienced Patent Counsel that infringement proceedings, including any interlocutory proceedings where relevant, stand a reasonable chance of success, the Licensee may request the Joint Owners to lend their names to such proceedings and provide reasonable assistance and the Joint Owners will do so subject to the Licensee giving them an indemnity in respect of all costs, damages and expenses that it may incur including any award of costs against them in so far as the aggregate of all such costs and damages may exceed that recoverable under the next following provisions. Where such infringement proceedings are conducted by the Licensee under the name of the Joint Owners the Licensee may apply all royalties due under Clause 4.2 hereof subsequent to the date of notification by the Licensee to the Joint Owners of the relevant infringement to defray any costs directly incurred by the Licensee (excluding award of costs in favour of third parties) provided however that the total liabilities or waiver of royalties of the Joint Owners hereunder shall in no circumstances exceed the sum of all royalties due subsequent to that date and up to the date of the delivery of the final decision in the relevant infringement proceedings and provided further that this provision shall only apply subject to the Licensee exercising all due diligence in pursuing the proceedings to a conclusion]. Any damages recovered shall be dealt with in a manner which shall be fair and reasonable as between the Joint Owners and the Licensee. 10.3 To the best of the Joint Owners' knowledge and belief the exercise of the rights granted or to be granted to the Licensee hereunder will not result in the infringement of valid patents of third parties. Subject thereto, the Joint Owners gives no warranty in this respect and does not give the Licensee any indemnity against costs, damages, expenses or royalties arising out of proceedings brought against the Licensee or any customer of the Licensee by any third party. Should the Licensee be sued for infringement of any patent or patents of the third party by reason of its manufacture, use or sale of the Products, the Joint Owners shall, on request, assist the Licensee in its defence to such action to the extent that in all the circumstances it is reasonable to do so but shall otherwise be under no Handbook of Venture Capital Documentation Page 124 obligations in respect thereof. All costs of any such action shall be borne by the Licensee to whom shall belong all sums that may be recovered from the third party. 10.4 If at any time during this Agreement the Licensee directly or indirectly opposes or assists any third party to oppose the grant of letters patent on any patent application within the Patent Rights or disputes or directly or indirectly assists any third party to dispute the validity of any patent within the Patent Rights or any of the claims thereof, the Joint Owners shall be entitled at any time thereafter to terminate all or any of the licences granted hereunder forthwith by notice thereof to the Licensee. 10.5 Where one party hereto has developed or acquired an Improvement to which Clause 8 above applies, it shall not publish the same or do anything that might prejudice the validity of any patent that might subsequently be granted on it until the other party has had at least 15 working days from disclosure in writing of all information relating to it to consider whether patent or other protection should be applied for. The first party will on request notify the other whether it intends to seek any relevant protection. If it does not wish to do so and if the other party within the 15 working day period notifies the first party that it would like to seek patent or other protection, and if it is agreed between the parties that the other party may do so, then this obligation shall continue for such time as may be reasonably required to prepare and file an application for patent or other protection. 10.6 Either party to this Agreement may at any time in respect of an Improvement elect not to pursue further an application for patent protection either jointly or on its own behalf or to maintain any such patent protection as it may have obtained and the party so electing shall notify the other party and shall if so requested assign all rights it may have therein to that other party provided that the party electing not to pursue the application or the resulting patent shall be entitled to a full irrevocable licence under all relevant rights with the right to sub- license. 10.7 Subject to the foregoing, each party shall be free to apply for patent protection for any invention not made in whole or in part by an employee of the other provided however that the specification in support thereof does not disclose any confidential information of the other. 11. Termination 11.1 If any party is in breach of any obligation on it hereunder and, in the case of a breach capable of remedy, it shall Handbook of Venture Capital Documentation Page 125 not have been remedied by the defaulting party within 28 days of written notice specifying the breach and requiring its remedy, or if the Licensee becomes apparently insolvent, has a receiver or administrator appointed over the whole or any part of its assets, enters into any compound with creditors, or has an order made or resolution passed for it to be wound up (otherwise than in furtherance of a scheme for amalgamation or reconstruction) or if the ownership or control of the Licensee shall pass into the hands of any legal person, which the Joint Owners in their reasonable discretion considers is unable to meet the obligations of the Licensee under this Agreement then the Joint Owners or, in the case of breach, the party not in breach of the obligation or condition, may forthwith terminate this Agreement by notice without prejudice to the accrued rights of either party. 11.2 Termination of this Agreement for any reason shall not bring to an end: (1) the confidentiality obligations on the parties hereto; (2) the Licensee's obligations to pay royalties or other sums which have accrued due or which will become due in respect of sales under Clause 11.4; (3) the obligations (if any) on the Licensee under Clause 11.5; (4) the licences (if any) under Clauses 8.5 and 10.6. 11.3 On termination of this Agreement for any reason, the Licensee shall continue to have the right for a period of twelve (12) months from the date of termination to complete deliveries on contracts in force at that date and to dispose of Products already manufactured subject to payment to the Joint Owners of royalties thereon in accordance with Clause 6.1above. 12. Force majeure 12.1 If any party to this Agreement is prevented or delayed in the performance of any of its obligations under this Agreement by force majeure, and if such party gives written notice thereof to the other parties specifying the matters constituting force majeure, together with such evidence as it reasonably can give and specifying the period for which it is estimated that such prevention or delay will continue, then the party in question shall be excused the performance or the punctual performance as the case may be as from the date of such notice for so long as such cause of prevention or delay shall continue. Handbook of Venture Capital Documentation Page 126 13. Arbitration 13.1 Any dispute between the parties arising under or in connection with this Agreement shall be referred to an Arbiter who will be appointed by mutual agreement failing which by the xxxxxxx for the time being of The Law Society of Scotland. 13.2 Without prejudice to any other powers, the Arbiter shall have power: to direct such surveys and valuations as may in his opinion be xxxxxxx to determine the rights of the parties; to order the execution of deeds, the performance of works, the carrying out of repairs, and the implementation of any provision of this Agreement; to award damages to or against any of the parties; and, to award interest on any sum due to one or other of the parties from the date of submission to Arbitration. 13.3 All arbitrations shall take place in Scotland and shall in all respects be governed by the law of Scotland. The Arbiter's decisions on questions of law shall be final and the provisions of section 3 of the Administration of Justice (Scotland) Act 1972 (power of Arbiter to state case to Court of Session) shall not apply in relation to an arbitration under this Clause. 13.4The costs of such arbitration shall, unless directed otherwise by the Arbiter be shared equally between the parties. 14. General 14.1 No variation or amendment of this Agreement shall bind either party unless made in writing in the English language and agreed to in writing by duly authorised officers of both parties. 14.2 In all cases where a provision of this Agreement is reducible, invalid or unenforceable in terms of any legislation or other legal authority, such provision shall not affect the validity of the remaining portion of this Agreement which shall remain in force and effect as if this Agreement had been granted with no such provision and it is hereby declared the intention of the parties that they would have executed the remaining portion of this Agreement without including therein any such provisions. 14.3 This Agreement shall be binding upon and ensure to the benefit of the parties hereto and their respective legal successors but shall not otherwise be assignable by the Licensee without the written consent of the Joint Owners which consent shall not be unreasonably withheld. Handbook of Venture Capital Documentation Page 127 14.4 A failure by either party hereto to exercise or enforce any rights conferred upon it by this Agreement shall not be deemed to be a waiver of any such rights or operate so as to bar the exercise or enforcement thereof at any subsequent time or times. 14.5 The headings in this Agreement are for convenience only and are not intended to have any legal effect. 14.6 The Licensee hereby undertakes and agrees to be solely responsible at its own cost and expense for dealing with and for any liability arising from any contractual, delictual or other claims or proceedings concerning the Products or their development, production, marketing, distribution or sale in particular product liability claims or proceedings. 14.7 The text of any press release or other communication to be published by or in the media concerning the subject matter of this Agreement shall require the approval of each party hereto. 15. Notices 15.1 Any notice required to be given hereunder by either party to the other shall be in writing and shall be served by sending the same by registered or Recorded Delivery Post to the address of the other party as given herein or to such other address as that party may have previously notified to the party giving notice at its address for such service. 15.2Any notice to the Joint Owners shall be sufficiently served if served as aforesaid to: In the case of the University of xxxxxxxxx to (names and places for each signatory) 15.3 Any notice to the Licensee shall be sufficiently served if served as aforesaid to [ ] for the attention of [ ]. 15.4 Any notice sent by Recorded Delivery Post shall be deemed duly served at the expiry of two days after the date of posting. In proving service, it shall be sufficient to prove that the envelope was duly addressed to the appropriate party in accordance with this Agreement 16. Governing Law Handbook of Venture Capital Documentation Page 128 This Agreement and all matters relating thereto shall be governed by the law of Scotland and the parties agree to prorogate the non-exclusive jurisdiction of the Court of Session. IN WITNESS WHEREOF these presents consisting of this and the [ ] preceding pages are executed by the parties hereto as follows: SIGNED FOR THE UNIVERSITY OF XXXXXXX by ........................................... Full Name ....................................... Date ............................ Witness .................................... Full Name .................................. Address .................................... ............................................ Occupation ................................. SIGNED FOR XXXXXXX UNIVERSITY by ........................................... Full Name ....................................... Date ............................ Witness .................................... Full Name .................................. Address .................................... ............................................ Occupation ................................. SIGNED FOR Licensee Co LIMITED by ................................................. Full Name ....................................... Date ............................ Witness .................................... Full Name .................................. Address .................................... ............................................ Occupation ................................. SIGNED FOR NEW CO LIMITTED by ……………………………… Full Name ....................................... Handbook of Venture Capital Documentation Page 129 Date ............................ Witness .................................... Full Name .................................. Address .................................... ............................................ Occupation ................................. This is the Schedule referred to in the foregoing Agreement Part 1 - Patent Rights Part 2 - Products Handbook of Venture Capital Documentation Page 130 DOCUMENT NUMBER 21 DOCUMENT TITLE INVESTMENT AGREEMENT PURPOSE OF Details of basis upon the investment is made DOCUMENT EXAMPLE OF USE Standard model document To: [ ] Limited [ ] [ [ ] ] (“the Company”) (“the Directors”) Dear Sirs We, Investor Co , a company limited by guarantee incorporated under the Companies Acts in Scotland with registered number [ ] and having our registered office at (place), (“Investor Co ”) hereby offer to [invest £[ ] in] [and] [to make a loan of £[ ] to] the Company, subject to the following terms and conditions:- 1 PURPOSE AND SOURCE OF INVESTMENT 1.1 The purpose of the investment will be:- £ [Purchase of fixed assets] [ [Working capital] ] [ ] Source £ [Investor Co equity] [ ] [Investor Co loan] [ ] [ ] [ ] ] ] [ ] 2 INVESTMENT [LOAN] SUMMARY Handbook of Venture Capital Documentation Page 131 2.1 WHEN THE CONDITIONS PRECEDENT SET OUT IN PART 1 OF THE SCHEDULE HAVE BEEN FULFILLED TO INVESTOR CO ‟S SATISFACTION INVESTOR CO WILL [SUBSCRIBE FOR SHARES IN THE COMPANY AS FOLLOWS:- Number of Shares Class of Shares Consideration £ [ ] [preference] [ ] [ ] [„A‟ ordinary] [ ] ] 2.2 [and] [lend to the Company and the Company shall borrow from Investor Co the sum of £[ ] (which sum or such part thereof as is for the time being and from time to time owing by the Company to Investor Co being hereinafter referred to as “the Loan”)] upon the following terms. 3 LOAN TERMS 3.1 Security 3.1.1 Prior to the advance of the Loan, the Company shall execute and deliver to Investor Co a [standard security [in respect of subjects at [ ]] [a bond and floating charge in respect of all sums due or to become due by the Company to Investor Co ] in the form agreed between the Company and Investor Co (herein together referred to as “the Security”) [and procure the execution and delivery to Investor Co by [its subsidiary[y][ies] of a [collateral standard security [in respect of subject at [ ]] [a collateral bond and floating charge] (herein [together] referred to as “the Collateral Security”)]. 3.1.2 The Company hereby agrees that repayment of the Loan together with interest thereon and all other monies and liabilities that may be owing or incurred by the Company to Investor Co in terms of this letter shall be secured by the Security [and the Collateral Security]. 3.1.3 The Company shall enter into a ranking agreement in the form agreed between Investor Co and [the Bank,] in terms of which the Security and [the Bank‟s securities] shall rank as follows:- 3.1.4 [ ]]. Handbook of Venture Capital Documentation Page 132 3.2 Interest 3.2.1 The Company shall pay Investor Co interest on the Loan at the rate of [ ] per cent per annum [above the LIBOR [ ] rate from time to time] which will be payable [by direct debit] [quarterly] [in arrears] on [ ], (each an “Interest Payment Date”) the first such payment to be made on [ ] for the period from Completion to [ ]. 3.2.2 [The Company shall pay interest on the Loan net of tax in accordance with Section 349(2) of the Income and Corporation Taxes Act 1988 and shall provide Investor Co at the time of payment with a certificate of deduction of tax in accordance with Section 352 of the Income and Corporation Taxes Act 1988.] 3.3 Repayment 3.3.1 Save as otherwise provided herein or by the Security [or the Collateral Security] the Company shall repay the Loan [by a single payment on [ ]] [by [ ] [annual] [half-yearly] [quarterly] [monthly] instalments [consisting of [ ] instalments of £[ ] and a final instalment of £[ ] each to be paid on [the last day of] [ ] in each year commencing on [ ] (or if any such day is not a Business Day, on the immediately preceding Business Day). 3.3.2 The Company will notify Investor Co forthwith in writing if on, or as a result of, a sale or transfer or allotment of any shares, the Company becomes a Quoted Company, or if a Control in the Company is obtained by any person or persons (whether or not a body corporate) who did not have Control of the Company on the date of the advance of the Loan; and upon receipt of such notification, Investor Co may within a period of 3 calendar months from receipt of such notice by Investor Co , by notice in writing require the Company to repay the Loan together with Handbook of Venture Capital Documentation Page 133 all interest accrued to the date of repayment and any other sums due to Investor Co . 3.4 [Default Interest 3.5 If any payment of capital is not made on the due date, interest shall continue to accrue on the Loan in terms of clause 3.2.1 and, in addition, the Company shall pay Investor Co interest on such capital from the due date until the date of actual payment at the rate of [ ] per centum per annum].] 4 SHARE RIGHTS 4.1 The shares to be subscribed for by Investor Co in terms of this Agreement will have the rights summarised for reference purposes only in Part 2 of the Schedule hereto, and set out at length in the articles of association of the Company in the terms approved by Investor Co to be adopted at Completion. Share Capital 4.2 Immediately after Completion the Company‟s authorised share capital will be £[ ] consisting of [ ] [preference] shares of [ ] each, [ ] [„A‟ ordinary] shares of [ ] each, and [ ] ordinary shares of [ ] each; and the Company‟s issued share capital will be:- [Preference] [„A‟ Ordinary] Ordinary Shares of Shares of [ Shares of [ [ ] each] FORMTEXT FORMTEXT ] each ] each Investor Co [ 5 6 [ FORMTEXT 7 8 FORMTEXT FORMTEXT ] [ 9 10] ] 11 12 BUSINESS CONDUCT AND INVESTMENT PROTECTION Handbook of Venture Capital Documentation Page 134 General Restrictions The Company will not, except with the prior written consent of Investor Co :- borrow monies or create charges; advance or lend any money with or without security or give any guarantees; factor its debts; alter or vary its Articles of Association, its authorised or issued share capital or the rights attaching to any class of share enter into any credit sale, hire purchase or equipment leasing facilities if the aggregate liability under all such agreements exceeds £[ ]; change its accounting reference period; while there are [ ] directors, allow the combined Benefits of the directors of the Company and any subsidiaries [excluding any non-executive director appointed by Investor Co in terms of clause  below] to exceed £[ ] Index Linked a year, and, in the event of there being a variation in the number of directors, allow the combined Benefits of the directors of the Company and any subsidiaries [excluding any non-executive director appointed by Investor Co in terms of clause  below] to exceed such other appropriate figure as Investor Co shall, acting reasonably, determine; allow the directors of the Company to invest in any other company or partnership (except for investments not exceeding 3% of any class of security traded on the Stock Exchange); expand or develop its business, or allow the expansion or development of the business of any subsidiary of the Company from time to time, Handbook of Venture Capital Documentation Page 135 except through itself, the Company or a wholly owned subsidiary of the Company; enter into a service or any other agreement with any director or Connected Person, or materially change such an agreement; incur capital or revenue expenditure above £[ ] in aggregate in excess of that provided for in the budget to be provided pursuant to clause [13.]3; permit any dealings which are not for full value and on an arms‟ length basis; appoint or change the auditors of the Company or any of its subsidiaries; and move the Company‟s main operating base outwith [West Lothian]. SUBSCRIPTION OPTION Investor Co shall have the option (“the Option”) at any time prior to [ ] or, if longer, for so long as Investor Co shall hold any share in the capital of the Company] [or for so long as any part of the Loan remains outstanding] (“the Option Period”) to subscribe at a price of £[ ] per share for such number of „A‟ Ordinary Shares of £[ ] each as represent [ ] per cent of the equity share capital (as defined by Section 744 of the Companies Act 1985) of the Company as enlarged by the allotment and issue of such shares and assuming for the purposes of calculation that all other existing options to subscribe for shares in the capital of the Company at the date of exercise of the Option have been exercised in full prior to the exercise of the Option. During the Option Period the Company will procure that:- there are at all times sufficient unissued shares in the share capital of the Company to effect the exercise of the Option without further increasing the share capital; Handbook of Venture Capital Documentation Page 136 no alteration is made to the share capital of the Company; none of the shares of any subsidiary of the Company held by the Company are transferred, sold, disposed or otherwise alienated without the prior written consent of Investor Co ; copies of notices of all shareholders meetings and of all circulars to shareholders are given to Investor Co at the same time as they are given to other shareholders; no change is made to the memorandum or articles of association of the Company without the prior written consent of Investor Co ; an offer to purchase any issued shares of the Company which would result in Control of the Company being obtained by any person or persons not in Control of the Company on the date of the Company‟s execution of this letter shall not be accepted and transfers resulting from such an offer shall not be registered unless the offer extends to the shares subject to the Option. The proceeds of subscription pursuant to exercise of the Option shall, if Investor Co so directs the Company in writing, be applied in the first instance in or towards [repayment of the Loan and/or] redemption of any of the Preference Shares held by Investor Co , in such proportions as Investor Co shall direct. The new „A‟ Ordinary Shares issued pursuant to the exercise of the Option will [rank pari passu in all respects with the existing „A‟ Ordinary Shares of the Company] [have the rights attributed to them in the agreed form of articles of association of the Company to be adopted by the Company at Completion.] PUT OPTION ON DEFAULT Investor Co shall be entitled by notice in writing to the Directors to require the Directors to purchase in such proportions as Investor Co may specify all of the shares held by Investor Co or its assignees (herein referred to “the Investor Co Shares”) in the share Handbook of Venture Capital Documentation Page 137 capital of the Company at the price (including any premium) originally subscribed by Investor Co for such shares at any time following the occurrence of either of the following events:- if the Company or any of the Directors fails to comply with any condition or undertaking contained herein, or, if any warranty given by [the Company and] any of the Directors to Investor Co proves to be materially untrue; if the Company fails to:- make payment on the due date of any dividend payable to Investor Co in terms of the articles of association of the Company; and/or redeem any Preference Shares held by Investor Co or its assignees on the due date for such redemption in terms of the articles of association of the Company; except in circumstances where payment of such dividend and/or redemption moneys, as the case may be, are prohibited in terms of the Companies Act 1985 (as amended or re-enacted from time to time) or other statutory provisions. OBSERVER Investor Co may appoint an observer to attend board meeting of the Company. Any such observer will not be entitled to vote at board meetings, but may table items for discussion and speak at board meetings. NON-EXECUTIVE DIRECTOR Investor Co may appoint a non-executive director to [chair] the Company and its subsidiaries from time to time. The Company will pay the director‟s fees. If the Company and the director cannot agree the level of fees to be paid, then Investor Co will fix a reasonable sum. CONSUMER CREDIT ACT 1974 Handbook of Venture Capital Documentation Page 138 To enable Investor Co to fulfil its obligations under the Consumer Credit Act 1974, the Company shall notify Investor Co immediately of any licence under such act issued to it or any company it controls, or if such a licence is revoked, or if it acquires or loses control of any company which holds such a licence. EXIT If any of the equity share capital of the Company is admitted to the Official List of the Stock Exchange or permission for any of the equity share capital of the Company to be dealt in on any Recognised Investment Exchange becomes effective:- there will be no restriction on dealing in the shares Investor Co holds in the Company; and Investor Co will not be required to give any warranty or indemnity to any party other than a warranty as to its title to the shares held by it in the Company. ENVIRONMENTAL OBLIGATIONS In connection with the environment, the Company and its subsidiaries from time to time will comply with all applicable legislation and regulations, maintain all required consents and licences and notify Investor Co immediately if the Company, or any subsidiary of the Company should so fail to comply or loses any such consent or licence. [Consider expanding and including environmental warranties if Company engaged in environmentally sensitive activities] INSURANCE The Company and its subsidiaries from time to time shall insure with a reputable insurance office and keep so insured at all times all of their respective assets in accordance with good commercial practice. INFORMATION The Company will give Investor Co : Audited Accounts within 4 months of the end of each financial year, copies of: Handbook of Venture Capital Documentation Page 139 audited accounts of the Company and of every subsidiary of the Company and audited consolidated accounts of any group of companies of which the Company forms part, in each case showing the information needed to calculate the dividends due to Investor Co ; any audit letters addressed to the directors of the Company or any subsidiary of the Company; Management Accounts within 3 weeks of each month end copies of monthly management accounts in a form acceptable to Investor Co ; Budgets prior to the start of each 12 month trading period, capital expenditure and trading budgets for that period; Other Information within a reasonable time, any further information about the financial position of the Company or any subsidiary of the Company, or the progress of the Company‟s, or any subsidiary of the Company‟s business which Investor Co may reasonably request; at the same time as they are given to the board of directors, all agendas, minutes and other documents circulated for (or following) discussion at a meeting of the board of directors; immediate written details of any actual or proposed offer to any of the ordinary shareholders of the Company to buy their shares. If the Company does not provide Investor Co with any of the information requested in this clause  within the time specified, Investor Co may appoint accountants to do so by attending the Company‟s premises, carrying out all necessary investigations and preparing the documents. The Company must co-operate with the accountants and pay their fees and expenses. Handbook of Venture Capital Documentation Page 140 WARRANTIES ALT. 1 Short form warranties appropriate to start-up. NB If MBO consider whether Directors should also be asked to warrant Target Accounts - see wording in ALT.2. The warranties in this clause are given subject to any matters fairly disclosed in any disclosure letter accepted by or on behalf of Investor Co . Each Director severally warrants to Investor Co as set out below. Information Documents There are no material inaccuracies in the factual information in the Accountants‟ Report and the opinions and forecasts it contains are reasonable. The Company has disclosed to Investor Co in writing all key assumptions underlying the profit and cash flow forecasts in the Business Plan [as updated by financial projections dated [ ]; The factual information in the Business Plan is accurate in all material respects; The opinions and forecasts in the Business Plan as updated by the financial projections dated [ ] are made on reasonable grounds after thorough enquiries; The Directors knows nothing which invalidates or potentially invalidates the opinions and forecasts in the Business Plan as updated by the said financial projections. Assets and Liabilities The Company has not traded. The Company has disclosed to Investor Co in writing all its assets actual and contingent liabilities including pending or threatened litigation director‟s service contracts; its share capital (issued, authorised and under option) and interests in the share capital of any other company. Intellectual Property Handbook of Venture Capital Documentation Page 141 The Company [and the Target] own outright all the intellectual property rights they need for [its]/[their] current or proposed business, and insofar as such intellectual property rights are capable of protection, they have been appropriately protected. Subsidiaries The Company has no subsidiaries [except for [ ] which [are all] [is a] wholly owned subsidiary[y][ies] within the meaning of Section 736 of the Companies Act 1985)]. Information Supplied The written information supplied to Investor Co by the Directors in connection with Investor Co ‟s investment was when given accurate in all material respects and remains accurate in all material respects. The Directors do not know of anything which makes the written information given to Investor Co misleading. The Directors know nothing which materially adversely affects the financial or trading prospects of the Company [or Target.] [So far as the Directors are aware there are no matters which would allow any claim to be made under the warranties contained in the Acquisition Agreement.] Directors’ Personal Interests Handbook of Venture Capital Documentation Page 142 Each of the Directors warrants, on his own account only, that he: has no business interests except for shareholdings in the Company or in companies quoted on the Stock Exchange; has never been: convicted of a criminal offence (except any road traffic offence not punished by a custodial sentence); disqualified from being a company director; the subject of an Inland Revenue or Customs & Excise investigation and, so far as he is aware, no such investigation is pending or threatened against him. Each of the Directors warrants, on his own account only, that neither he nor anyone with whom he is Connected has any contract with the Company [or the Target], nor owns any property used by the Company [or the Target]. Each of the Directors warrants, on his own account only, that the information contained within the director‟s information form submitted by him to Investor Co is true and accurate. The warranties in this Clause 15 shall be deemed to be given immediately before Completion ALT 2 Warranties appropriate to an existing business. The warranties in this clause are given subject to any matters fairly disclosed in any disclosure letter accepted by or on behalf of Investor Co . The Company and the Directors jointly and severally warrant to Investor Co as set out below. Information Documents There are no material inaccuracies in the factual information in the Accountants‟ Report and the opinions and forecasts it contains are reasonable. The Company as disclosed to Investor Co in writing all key assumptions underlying the profit and cash flow forecasts in Handbook of Venture Capital Documentation Page 143 the Business Plan [as updated by financial projections dated [ ]; The factual information in the Business Plan is accurate in all material respects; The opinions and forecasts in the Business Plan as updated by the financial projections dated [ ] are made on reasonable grounds after thorough enquiries; The Directors know nothing which invalidates or potentially invalidates the opinions and forecasts in the Business Plan as updated by the said financial projections. Accounts The financial position of the Company at [ ] was that disclosed by the audited balance sheet and trading and profit and loss accounts of the Company as at that date, which are true and accurate, and the financial position of the Company at [ ] was that disclosed by the management accounts of the Company as at that date which are true and accurate in all material respects. Since [the management accounts date]: there has been no material adverse change in the financial or trading position or prospects of the Company and its subsidiaries; the business of the Company and the subsidiaries has been carried on in the ordinary course; except in the normal course of business, there has not been any acquisition or disposal of assets by the Company or any subsidiary of the Company. [NB If investment is to fund an MBO, additional warranties on the Target accounts may be required.] Assets and Liabilities The Company has disclosed to Investor Co in writing all its and its subsidiaries: assets; Handbook of Venture Capital Documentation Page 144 actual and contingent liabilities, including pending or threatened litigation; director‟s service contracts; share capital (issued, authorised and under option) and interests in the share capital of any other company. Neither the Company nor any of the Directors is or has been the subject of an Inland Revenue or Customs & Excise investigation and, so far as the Company and the Director are aware, no such investigation is pending or threatened against any of them. Intellectual Property The Company [and the Target] own outright all the intellectual property rights they need for their current or proposed business, and insofar as such intellectual property rights are capable of protection, they have been appropriately protected. Subsidiaries The Company has no subsidiaries [except for [ ] which [are all] [is a] wholly-owned subsidiar[y][ies] (within the meaning of Section 736 of the Companies Act 1985).] Information Supplied The written information supplied to Investor Co by the Directors in connection with Investor Co ‟s investment was when given accurate in all material respects and remains accurate in all material respects The Directors do not know of anything which makes the written information given to Investor Co misleading. The Directors know nothing which materially adversely affects the financial or trading prospects of the Company [or Target.] [So far as the Directors are aware there are no matters which would allow any claim to be made under the warranties contained in the Acquisition Agreement.] Directors‟ Personal Interests Handbook of Venture Capital Documentation Page 145 Each of the Directors warrants, on his own account only, that he: has no business interests except for shareholdings in the Company or in companies quoted on the Stock Exchange; has never been: convicted of a criminal offence (except any road traffic offence not punished by a custodial sentence); disqualified from being a company director. Each of the Directors warrants, on his own account only, that neither he nor anyone with whom he is Connected has any contract with the Company [or the Target], nor owns any property used by the Company [or the Target Each of the directors warrants, on his own account only, that the information contained within the director‟s information form submitted by him to Investor Co is true and accurate.] The warranties in this Clause  shall be deemed to be given immediately before the subscription by Investor Co in the Company. WARRANTY LIMITATIONS ALT 1: Start up/MBI Each Director‟s liability for all claims for breach of the warranties is limited as follows: Director Limit (£) [ ] [3x salary] Investor Co may not claim for breach of the warranties unless the total amount of all claims exceeds £[2,000] but may then claim the whole amount and not just the excess over £[2,000] In order to make a valid claim for breach of the warranties, Investor Co must have intimated the claim in writing to the relevant Director giving reasonable details of the claim (on the basis of the facts then Handbook of Venture Capital Documentation Page 146 known to Investor Co ) within 6 months of the delivery to Investor Co of the signed audited accounts of the Company, and, where appropriate, the audited consolidated accounts of the Company and its subsidiaries, for the year ending or current on [ ]. None of the above restrictions on liability shall apply to any claim which (or delay in the discovery of which) is the consequence of fraud, wilful misconduct or wilful concealment by the Directors. ALT 2: Existing Business The total liability of the Company and the Directors in respect of all claims under the above warranties shall be limited to £[total Investor Co investment] [plus a sum equal to the aggregate of [all arrears and accruals of dividend] [and] [interest] and the reasonable costs and liabilities incurred by Investor Co in pursuing its claim. Investor Co may not claim for breach of the warranties unless the total amount of all claims exceeds £[2,000] but may then claim the whole amount and not just the excess over £[2,000]. In order to make a valid claim for breach of the warranties, Investor Co must have intimated the claim in writing to the Company or the relevant Director, as the case may be, giving reasonable details of the claim (on the basis of the facts then known to Investor Co ) within 6 months of the delivery to Investor Co of the signed audited accounts of the Company, and, where appropriate, the audited consolidated accounts of the Company and its subsidiaries, for the year ending or current on [should see two audits]. None of the above restrictions on liability shall apply to any claim which (or delay in the discovery of which) is the consequence of fraud, wilful misconduct or wilful concealment by the Company or the Directors. INFORMATION AND PUBLICITY Handbook of Venture Capital Documentation Page 147 Investor Co may disclose information about the Company and its subsidiaries and Investor Co ‟s investment in the Company to: any investor, lender or shareholder in the Company or its subsidiaries; as required by law or by the Stock Exchange or by any regulatory authority to which it is subject; the directors and members of Investor Co from time to time. With the Company‟s consent Investor Co may disclose information about the Company and its subsidiaries and Investor Co ‟s investment in the Company to any potential investor in, or potential lender to, the Company or its subsidiaries. No press release or other public intimation of this offer or of the investment to follow herein shall be made without the prior written consent of Investor Co . ASSIGNATION Investor Co shall be entitled to assign and transfer the benefit of any agreement to follow hereon (whether constituted by acceptance of this offer or otherwise) between the Company and Investor Co to any or all of the members of Investor Co from time to time or to any body of persons which shall have acquired the whole or any part of the undertaking of Investor Co or to any holding company or subsidiary or subsidiary of any holding company of any of the foregoing. FEES The Company will pay to Investor Co : a negotiation fee of £[ ] on acceptance of this offer; Investor Co ‟s solicitors‟ fees and expenses in connection with this letter and the preparation of new articles of association of the Company, payable on Completion [provided that the Company shall pay such of Investor Co ‟s solicitor‟s fees and expenses as have been incurred if matters do not progress to Completion]; Handbook of Venture Capital Documentation Page 148 [an annual monitoring fee of £[ ] [plus VAT], payable [monthly] on [ ]. The Company shall make all payments of fees, capital and interest by direct debit or in such other manner as Investor Co may require. Any certificate issued by Investor Co stating the amount owing to Investor Co by the Company will, in the absence of manifest error, conclusively determine the amount owing to Investor Co by the Company. DEFINITIONS The following definitions apply in this letter Acquisition Agreement means the agreement made between the Company and [ ] Limited whereby the Company shall purchase the whole of the issued share capital of Target; Benefits means all salary and emoluments including fees and percentages sums paid by way of expenses allowance (if taxable); pension contributions; and benefits in kind (Note: all these sums need to be disclosed in the Company‟s audited accounts); Business Day means a day on which the London Interbank Sterling Market is open for dealings between commercial banks generally; Complete, Completion means when Investor Co [subscribe for shares in] [and] [or] [makes the Loan to] the Company; Connected Persons and person connected shall mean any person or persons connected with another person within the definition of connected persons contained in Handbook of Venture Capital Documentation Page 149 Section 839 of the Income and Corporation Taxes Act 1988; Control has the meaning attributed to it in Section 840 of the Income and Corporation Taxes Act 1988; [LIBOR means [the rate at which Investor Co certify to the Company as being the rate at which Investor Co is then able to borrow in London sterling funds equal to the Loan then outstanding for repayment on the next Interest Payment Date];] Target means [ ] and its subsidiaries (if any); Index Linked means adjusted annually each [ ] starting on 1 [ ]. The amount of the increase shall be the percentage increase in the retail price index for the preceding 12 months except for the first increase which shall be made by reference to the period from the first day of the month in which Completion takes place to [ ]; Quoted Company means a company any of whose shares are listed or dealt in on a Recognised Investment Exchange; and Recognised Investment Exchange means a recognised investment exchange as defined by Section 207 of the Financial Services Act 1986 or the Alternative Investment Market or OFEX. PERIOD OF OFFER WE MAY REVISE OR WITHDRAW THIS OFFER UNLESS THE ACCEPTANCE HAS BEEN RECEIVED ON OR BEFORE ( ) AND THE OFFER WILL LAPSE IF COMPLETION OF THE LEGAL DOCUMENTATION HAS NOT BEEN ACHIEVED WITHIN ( ) WEEKS OF THE DATE OF ACCEPTANCE. Handbook of Venture Capital Documentation Page 150 PROCEDURE FOR ACCEPTANCE IF YOU WISH TO ACCEPT THIS OFFER, PLEASE SIGN, DATE AND RETURN THE ENCLOSED COPY TOGETHER WITH YOUR CHEQUE FOR £ PLEASE NOTE THAT INVESTOR CO DOES NOT PROVIDE PERSONAL INVESTMENT ADVICE. IF YOU ARE IN ANY DOUBT ABOUT THE TERMS OF THE OFFER OR ABOUT THE ACTION YOU SHOULD TAKE, YOU SHOULD CONSULT YOUR INDEPENDENT FINANCIAL ADVISER AUTHORISED UNDER THE FINANCIAL SERVICE ACT 1986. Yours sincerely [ ] For and on behalf of Investor Co We, [ ] Limited and [ ] and [ ], the Directors of [ ] Limited hereby accept the foregoing offer of finance from Investor Co on the terms and conditions stated above and enclose our cheque in the amount of £[ ] in payment of Investor Co ‟s negotiation fee. For and on behalf of [ ] Limited Handbook of Venture Capital Documentation Page 151 Director Date .............................. ......................... ............................. .............................. .... Director Witness .............................. ......................... ............................. ............................ Name of Witness .................... ........................... Address ......................... ............................ .............................. ....................... Occupation ......................... ............................ Handbook of Venture Capital Documentation Page 152 This is the Schedule in two parts referred to in the foregoing letter from Investor Co to [insert Company name] Limited and [insert names of directors]. THE SCHEDULE Part 1 Conditions Precedent to Investor Co Investment Investor Co ‟s investment will only be made available when 1 Investor Co is satisfied with:- 1.1 the Memorandum and Articles of the Company including the incorporation of the rights attaching to the „A‟ Ordinary Shares and Preference Shares; 1.2 the result of a Companies Registry Search against the Company and each of its subsidiaries immediately before Completion; 1.3 the warranties and any disclosures by [the Company and] the Directors; 1.4 the terms of the [Accountants Report] to be prepared by [ ]; 1.5 the financial position of the Company immediately before Completion and the Company‟s procedures for producing management accounting information; 1.6 the terms and conditions of loan and overdraft facilities from [ ]; 1.7 the insurance cover of the Company; 1.8 the terms of the Company‟s occupation of its trading premises; 1.9 an unqualified acceptance of this offer by the Company and the Directors; 1.10 a certificate from the Company‟s solicitors confirming the status of the Company; Handbook of Venture Capital Documentation Page 153 1.11 the terms and conditions of any service agreements between the Company and its directors (including the Directors); 1.12 an agreement between all shareholders of the Company agreeing to implement and be bound by the terms hereof. Handbook of Venture Capital Documentation Page 154 Part 2 Summary of Share Rights 2 DIVIDENDS [Preference Shares 2.1 Fixed Dividend 2.1.1 Amount: [ ] pence per share per annum; 2.1.2 Payment: accrues from [date of subscription] and is payable half yearly on [ ] and [ ] each year, the first payment to be made on [ ]. 2.2 Participating Dividend 2.2.1 Amount: such sum which when added to the Fixed Dividend payable in that year is equal to [ ] per cent of the Net Profit earned in that year; 2.2.2 Payment: accrues from [date of subscription] and is payable not more than 14 days after general meeting at which audited accounts presented.] „A‟ Ordinary Shares 2.3 Fixed Dividend 2.3.1 Amount: [ ] pence per share per annum; 2.3.2 Payment: accrues from [date of subscription] and is payable half yearly on [ ] and [ ] each year, the first payment to be made on [ ]. 2.4 Participating Dividend 2.4.1 Amount: such sum which when added to the Fixed Dividend payable in that year is equal to [ ] per cent of the Net Profit earned in that year; Handbook of Venture Capital Documentation Page 155 2.4.2 Payment: accrues from [date of subscription] and is payable not more than 14 days after general meeting at which audited accounts presented.] 2.5 Net Profit means: net profit as shown in the audited consolidated profit and loss account of the Company and its subsidiaries for the relative financial year but: 2.5.1 before any provision is made for dividends or transfers to reserves; 2.5.2 before deducting any tax; 2.5.3 before deducting any sum in respect of Directors‟ Benefits in excess of £[ ]. Additional Dividend 2.6 [Both the holders of the Preference Shares and] the „A‟ Ordinary Shares are entitled to an additional dividend if the total Benefits received by directors and former directors and their Connected Persons exceed £[ ] per annum (“Excess Benefits”). This is a dividend on each share held by Investor Co of an amount equal to the Excess Benefits divided by the number of ordinary shares held by such directors and their Connected Persons. Ordinary Dividend 2.7 Once all of the above dividends have been paid and all Preference Shares which have fallen due for redemption have been redeemed, the ordinary shareholders are entitled to a dividend of an amount up to but not exceeding the aggregate of the fixed dividend and participating dividend paid on each „A‟ Ordinary Share for such year. 2.8 Any balance of profits remaining are distributed equally amongst the holders of the [Preference Shares and the] „A‟ Ordinary Shares and the Ordinary Shares, pari passu as if the same constituted one class of share. 3 Capital Handbook of Venture Capital Documentation Page 156 On a return of assets the assets of the Company remaining after payment of its liabilities are to be applied as follows: 3.1 Holders of Preference Shares: £[ ] [such sum per share as would have been payable if such share had been redeemed on due date] plus any arrears or accruals of dividend; 3.2 Holders of „A‟ Ordinary Shares: £[ ] per share plus any arrears or accruals of dividend; 3.3 Holders of Ordinary Shares: £[ ] per share; 3.4 The balance of the assets is to be distributed amongst the holders of [Preference Shares and] „A‟ Ordinary Shares and Ordinary Shares pari passu as if the same constituted one class of share. 4 Voting Rights 4.1 Each „A‟ Ordinary Share and each Ordinary Share has one vote. The holders of Preference Shares shall be entitled to receive notice of and attend all general meetings but not to vote thereat [unless the dividends on the Preference Shares are in arrears or redemption of the Preference Shares is in arrears or the Company or the Directors commit a material breach of the terms of this letter, or any sum owed to a third party by the Company becomes due and payable before the original due date for payment]. 5 Redemption of Preference Shares 5.1 The Preference Shares shall be redeemed by the Company in instalments of [ ] shares on [ ] at a price of £[ ] per share plus a sum equal to any arrears or accruals of the dividends payable on the Preference Shares. 5.2 The Preference Shares shall also become redeemable or must be purchased by a third party purchaser before any of the share capital of the Company shall be or become listed on any Stock Exchange or any other security market.] 6 Note: The above is a short summary only of the rights attaching to the Preference and „A‟ Ordinary Shares and is not exhaustive. Reference must be made to the terms of the Handbook of Venture Capital Documentation Page 157 draft articles of association to be prepared by Investor Co ‟s solicitors. Handbook of Venture Capital Documentation Page 158 DOCUMENT NUMBER 22 DOCUMENT TITLE ARTICLES OF ASSOCIATION PURPOSE OF The „internal‟ constituency of New Co DOCUMENT EXAMPLE OF USE These are typical Articles characterised by issues of control over expenditure and controls relating to the investor‟s income stream (dividends) and exist (redemption or share transfer/sale). KEY SENSITIVITIES Ratchets are often a sensitive item for management. This is the mechanism whereby share ownership (between investors and management) change as the capital worth of the company increases resulting in share redemption or an increased share value (and company PE) or capital worth decreases resulting in loss of management share options or compulsory transfers. THE COMPANIES ACT 1985 COMPANY LIMITED BY SHARES NEW ARTICLES OF ASSOCIATION of [ ] LIMITED Company number: [ ] Adopted by special resolution on: [ ] 1. PRELIMINARY 1.1 In these Articles the undernoted expressions shall have the meanings set opposite them below: the Act shall mean the Companies Act 1985 including any statutory modification or re-enactment for the time being in force; Benefits shall mean all salary, fees and emoluments including sums paid by way of expenses allowance (if taxable), pension contributions and the cash value of benefits in kind; Connected Persons shall have the meaning ascribed to it in Section 839 of the Income and Corporation Taxes Act 1988; Handbook of Venture Capital Documentation Page 159 Excess Benefits shall while there are a total of [insert number of directors on date of adoption of articles] directors of the Company and its subsidiaries, mean Benefits in excess of EUR [ ] Index Linked in the aggregate payable in respect of the relevant financial year to the Relevant Directors and, in the event of there being a variation in the number of directors of the Company and its subsidiaries, shall mean Benefits in excess of such other figure as the holders of at least 75% of the Preference Shares and 75% of the „A„ ordinary shares may determine payable in respect of the relevant financial year to the Relevant Directors; Family Trust shall mean in relation to any member a trust which does not permit any of the settled property or the income therefrom to be applied otherwise than for the benefit of that member and/or a Privileged Relation of that member and under which no power of control is capable of being exercised over the votes of any shares which are the subject of the trust by any person other than the trustees or such member or his Privileged Relations; Flotation shall mean the becoming effective of a listing for any share capital of the Company on the Official List of The Stock Exchange or the granting of permission for any of the share capital of the Company to be dealt in on any recognised investment exchange (as defined by Section 207 of the Financial Services Act 1986) and/or on the Alternative Investment Market and/or on OFEX; Index Linked shall mean adjusted annually on  [November] each year commencing on  [November 199[ ] by a percentage equal to the percentage increase in the retail price index published by the Government to [31 October] in the year in question from [31 October] in the previous year; [the Investment Offer shall mean the offer from Investor Co to and accepted by the Company of even date with the adoption of these Articles;] Privileged Relations shall mean in relation to a member the spouse or widow or widower of the member and the member‟s children and grandchildren (including step and adopted children and their issue) and step and adopted children of the member‟s children; Handbook of Venture Capital Documentation Page 160 Relevant Directors shall mean the directors and former directors of the Company and its subsidiaries (excluding any director appointed pursuant to Article  hereof) and their Connected Persons; settlor shall mean a testator or an intestate in relation to a Family Trust arising respectively under a testamentary disposition or an intestacy of a deceased member; the Statutes shall mean the Act and any other statutory provisions from time to time affecting companies and applicable to the Company; Investor Co shall mean (name), a company limited by guarantee incorporated under the Companies Acts in Scotland with registered number [ ] and having its registered office at (Place) the Investor Co Group shall mean (name), any subsidiary or holding company or member for the time being of (name), or any body of persons which shall have acquired the whole or substantially the whole of the undertaking of any of these companies whatsoever and the expression “member of the Investor Co Group” shall be construed accordingly; [the Investor Co Option shall mean the option granted to Investor Co to subscribe for [„A‟] Ordinary Shares of EUR  each of the Company in terms of [the Investment Offer] [an Option Agreement executed by the Company of even date with the adoption of these Articles.] 1.2 The Regulations contained in Table A in the Schedule to the Companies (Tables A to F) Regulations 1985 as amended by the Companies (Tables A to F) (Amendment) Regulations 1985 (such Table being hereinafter called “Table A”) shall apply to the Company save in so far as they are excluded or varied hereby and such Regulations (save as so excluded or varied) and the Articles hereinafter contained shall be the regulations of the Company. 1.3 Regulations 54, 73-80 (inclusive), 85, 86, 94-98 (inclusive) and 118 of Table A shall not apply to the Company. Regulation 6 of Table A shall be amended by the deletion of the words “shall be sealed with the seal” where they appear on the sixth line thereof. Handbook of Venture Capital Documentation Page 161 2. SHARE CAPITAL 2.1 The share capital of the Company at the date of the adoption of these Articles is EUR [ ] divided into [ ] Preference Shares of EUR 1 each (in these Articles referred to as “Preference Shares”), [ ] „A‟ Ordinary Shares of EUR 1 each (in these Articles referred to as “„A‟ Ordinary Shares”) and [ ] Ordinary Shares of EUR 1 each (in these Articles referred to as “Ordinary Shares”). 2.2 The rights attaching to the respective classes of shares shall be as follows:- 2.2.1 Income The profits of the Company in respect of any financial year shall be applied:- 220.127.116.11 First in paying to the holders of the Preference Shares a fixed cumulative preferential net cash dividend (hereinafter in these Articles referred to as “the Preference Dividend”) of [ ] pence per annum per share on the Preference Shares held by them respectively to be payable half yearly on [ ] and [ ] in each year, provided always that the first dividend shall be payable on [ ] in respect of the period from the date of allotment of the Preference Shares to [ ]; 18.104.22.168 Second, [but only if there are no „A‟ Ordinary Shares in issue,] in paying to the holders of the Preference Shares a cumulative net cash dividend (hereinafter in these Articles referred to as “the Participating Preference Dividend”) of a sum equal to the amount if any, (exclusive of tax credit) by which [ ] per cent of the net profit for the relative financial year exceeds the aggregate of the Preference Dividend paid in and for that financial year. The Participating Preference Dividend (if any) shall be payable not more than 14 days after the General Meeting at which the audited accounts of the Company for the relative financial year are presented provided in the event that the audited accounts of the Company for any financial year have not been presented at a General Meeting of the Company on the date (hereinafter called “the relevant date”) four months after the end of such Handbook of Venture Capital Documentation Page 162 financial year then an interim dividend on account of the Participating Preference Dividend will be paid within fourteen days of the relevant date and will be the same amount as the equivalent Participating Preference Dividend in the immediately preceding financial year. If following the presentation of the audited accounts of the Company for the said period an overpayment or underpayment of the Participating Preference Dividend shall be proved to have been made the directors shall (in the case of an underpayment) within 30 days of presentation of the relevant audited accounts, declare and pay a final dividend of an amount equal to any shortfall and (in the case of an overpayment) the amount of any overpayment shall be treated as discharging pro tanto the liability of the Company in respect of the next succeeding payment or payments of the Participating Preference Dividend. For the purposes of this Article the expression “net profit” shall mean the net profit of the Company and its subsidiaries calculated on the historical cost accounting basis as shown in the audited consolidated profit and loss account of the Company and its subsidiaries for the relative financial year (to the nearest EUR 1) but:- 22.214.171.124.1 before any provision is made for any dividend on any share in the capital of the Company or any of its subsidiaries or for any other distribution or for the transfer of any sum to reserve; 126.96.36.199.2 before deducting any corporation tax (or any other tax levied upon or measured by profits and gains) on the profits earned and gains realised by the Company and its subsidiaries; 188.8.131.52.3 before deducting any sum in respect of Excess Benefits; 184.108.40.206 Third, in paying to the holders of the „A‟ Ordinary Shares a fixed preferential net cash dividend (hereinafter referred to as “the Fixed Handbook of Venture Capital Documentation Page 163 Dividend”) of [ ] pence per annum per share on the „A‟ Ordinary Shares held by them respectively to be payable half yearly on [ ] and [ ]in each year, provided always that the first such dividend shall be payable on such half yearly date which follows the date of subscription for the „A‟ Ordinary Shares, in respect of the period from the date of subscription to such half yearly date. 220.127.116.11 Fourth, in paying to the holders of the „A‟ Ordinary Shares a cumulative net cash dividend (hereinafter referred to as “the Participating „A‟ Ordinary Dividend”) of a sum equal to the amount, if any, (exclusive of tax credit) by which [ ] per cent of the net profit for the relative financial year exceeds the aggregate of the Fixed Dividend paid in and for that financial year, such Participating „A‟ Ordinary Dividend to be calculated in accordance with the provisions of Article 18.104.22.168, on the same basis as the Participating Preference Dividend. 22.214.171.124 Fifth, in paying to the holders of the Preference Shares and the holders of the „A‟ Ordinary Shares in respect of each financial year of the Company a cumulative preferential net cash dividend (hereinafter in these Articles referred to as “the Additional Dividend‟) on each share held by them of an amount equal to the Excess Benefits divided by the number of Ordinary Shares held by Relevant Directors on the last day of the relevant financial year. The Additional Dividend (if any) shall be paid on the due date for payment of the Participating Preference or Participating „A‟ Ordinary Dividend as appropriate. No dividend shall be declared or paid to the holders of Ordinary Shares in respect of any financial year of the Company unless and until:- 126.96.36.199.1 the Preference Dividend and the Fixed Dividend and the Participating Preference Dividend (if any) and the Handbook of Venture Capital Documentation Page 164 Participating „A‟ Ordinary Dividend (if any) have been paid in full in respect of that financial year and in respect of all previous financial years of the Company; 188.8.131.52.2 any Additional Dividend due has been paid in full; 184.108.40.206.3 all Preference Shares which have fallen due for redemption have been redeemed; Subject to the terms of Article 220.127.116.11 above being fulfilled, the profits which the Company may determine to distribute in respect of any financial year shall be applied: - 18.104.22.168.1 First in paying to the holders of the Ordinary Shares a dividend („the Initial Ordinary Dividend‟) on each share of an amount up to but not exceeding the aggregate of the Fixed Dividend and the Participating „A‟ Ordinary Dividend paid on each „A‟ Ordinary Share for such year; and 22.214.171.124.2 Second with the prior written consent of [the holders of 75% of the Preference Shares, and] the holders of 75% of the „A‟ Ordinary Shares in distributing the balance of such profits amongst the holders of the Preference Shares and the „A‟ Ordinary Shares and the Ordinary Shares (pari passu as if the same constituted one class of share). 126.96.36.199 Every dividend shall be distributed to the appropriate shareholders pro rata according to the number of fully paid up shares of the appropriate class held by them respectively and shall accrue on a daily basis. 188.8.131.52 Unless the Company has insufficient profits available for distribution and the Company is thereby prohibited from paying dividends by the Statutes the Preference Dividend and the Handbook of Venture Capital Documentation Page 165 Participating Preference Dividend and the Fixed Dividend and the Participating „A‟ Ordinary Dividend and the Additional Dividend shall (notwithstanding regulations 102 to 108 of Table A or any other provisions of these Articles and in particular notwithstanding that there has not been a recommendation of the directors or resolution of the Company in general meeting) be paid immediately on the due date and if not then paid shall be a debt due by the Company and be payable in priority to any other dividend. 184.108.40.206 The Company shall procure that each of its subsidiaries which has profits available for distribution shall from time to time declare and pay to the Company such dividends as are necessary to permit lawful and prompt payment by the Company of the Preference Dividend, the Participating Preference Dividend, the Fixed Dividend, the Participating „A‟ Ordinary Dividend and the Additional Dividend. 2.2.2 Conversion of the „A‟ Ordinary Shares The holders of „A‟ Ordinary Shares shall be entitled at any time to convert all (but not some only) of the „A‟ Ordinary Shares held by them into Ordinary Shares and the following provisions shall have effect: - 220.127.116.11 the basis of such conversion shall be one Ordinary Share of EUR 1 for each „A‟ Ordinary Share held; 18.104.22.168 such conversion shall be effected by notice in writing (“the Conversion Notice”) signed by the holder given to the Company at its Registered Office for the time being; 22.214.171.124 such conversion shall take effect immediately upon delivery of the Conversion Notice to the Company; 126.96.36.199 the „A‟ Ordinary Shares so converted shall rank for an apportioned part of the dividends on the „A‟ Ordinary Shares in respect of the financial year current at the date of conversion and the Ordinary Shares resulting from such conversion shall rank for dividend in respect of Handbook of Venture Capital Documentation Page 166 the financial year of the Company current at the date of conversion only to the extent that the amount of dividend per share declared or paid on the Ordinary Shares in respect of that financial year exceeds the aggregate amount per share by way of dividends paid on the „A‟ Ordinary Shares so converted in respect of the period of that financial year up to and including the date of conversion; 188.8.131.52 subject to the provisions of Article 184.108.40.206 the Ordinary Shares resulting from such conversion shall for all purposes rank pari passu with the Ordinary Shares issued prior to the date of such conversion and such Ordinary Shares so resulting and those so issued shall together constitute one class of share; 220.127.116.11 forthwith after conversion the holders of the Ordinary Shares resulting from the conversion shall send to the Company the Certificates in respect of their holding of „A‟ Ordinary Shares and the Company shall issue to such holders Certificates for the Ordinary Shares resulting from the conversion; 18.104.22.168 there shall be paid on each of the „A‟ Ordinary Shares so converted a sum equal to any arrears, deficiency or accruals of the dividends thereon to be calculated down to the date of conversion whether such dividends have been declared or earned or not. 2.2.3 CAPITAL On a return of assets on liquidation or otherwise, the assets of the Company remaining after the payment of its liabilities shall be applied:- 22.214.171.124 First, in paying to the holders of the Preference Shares [the various sums per share that would have been payable to the Preference Shareholders if all such Preference Shares had been redeemed as scheduled in Article [126.96.36.199] before such return of assets] [ ] together with a sum equal to any arrears and accruals of the dividends on such shares to be calculated down to the date of the return of Handbook of Venture Capital Documentation Page 167 capital and payable irrespective of whether such dividends have been declared or earned or not; 188.8.131.52 Second, in paying to the holders of the „A‟ Ordinary Shares EUR  per share together with a sum equal to any arrears and accruals of the dividends on the „A‟ Ordinary Shares calculated down to the date of the return on capital and payable irrespective of whether such dividends have been declared or earned or not; 184.108.40.206 Third, in paying to the holders of the Ordinary Shares EUR  per share; 220.127.116.11 Fourth, the balance of such assets shall be distributed among the holders of [the Preference Shares and] the „A‟ Ordinary Shares and Ordinary Shares pan passu as if the same constituted one class of share and that pro rata according to the number of fully paid shares held by them respectively. 2.2.4 Redemption of the Preference Shares 18.104.22.168 Subject to the provisions of the Act the Preference Shares shall be redeemed by the Company in the proportions and on the dates set out below:- Number of Shares Date of Redemption [ ] 22.214.171.124 The Company shall (unless the holders of at least 75% of the Preference Shares give notice in writing to the Company to the contrary), before any of its share capital shall be or become listed on any stock exchange or other securities market or permission is granted for any of its share capital to be dealt in on any recognised investment exchange (as defined by Section 207 of the Financial Services Act 1986) or any of its share capital shall be subject to any other marketing arrangement, redeem in accordance with the provisions of this Article 2.2.4, or procure the purchase by a third party of, all the Preference Shares then in issue. Any such redemption or purchase shall be at a price per Handbook of Venture Capital Documentation Page 168 share equal to the aggregate of EUR [ ] and a sum equal to any arrears or accruals of the dividends payable on that share to be calculated down to the date of redemption or purchase and whether any such dividends have been declared or earned or not together with all tax credits relating thereto [and to the cash premium of [ ]p paid over the nominal value]; If on any of the dates set out in Articles 126.96.36.199 and 188.8.131.52, the Company cannot comply with the provisions of the Statutes and of the provisions contained herein relating to the redemption to be made on such dates, redemption shall take place on such later date on which the Company shall first be able so to comply; 184.108.40.206 There will be paid on each of the Preference Shares redeemed in terms of Article 220.127.116.11 [the sum of EUR [ ] per share (including a cash premium of EUR [ ]) in respect of Preference Shares due for redemption on [ ], EUR [ ] per share (including a cash premium of EUR [ ]) in respect of Preference Shares due for redemption on [ ] and EUR [ ] per share (including a cash premium of EUR [ ]) in respect of Preference Shares due for redemption on [ ]][ ] together with [in each case] (i) a sum equal to all arrears and accruals of the dividends payable on that share to be calculated down to the date of redemption whether any such dividend has been earned or declared or not together with all tax credits relating thereto [and to the cash premium paid over the nominal value]; 18.104.22.168 The Preference Shares to be redeemed in accordance with the foregoing provisions of this Article 2.2.4 shall be redeemed by the Company at the Registered Office of the Company; 22.214.171.124 At the time specified in Articles 126.96.36.199 and 188.8.131.52 above and at the place specified in Article 184.108.40.206 above, each registered holder of the Preference Shares shall be bound to surrender to the Company the certificate for the shares which are redeemed in order that the same may be Handbook of Venture Capital Documentation Page 169 cancelled, and upon such surrender, the Company shall pay such registered holder the amount payable in respect of such redemption provided that if any certificate so surrendered to the Company includes any shares not redeemable on the occasion on which it is to be so surrendered, a fresh certificate for the balance of the shares not redeemable on that occasion shall be issued to the holder surrendering such certificate to the Company; 220.127.116.11 In the case of the redemption of less than all of the Preference Shares for the time being in issue, the Company shall be bound to redeem such a proportion of the Preference Shares of each holder thereof as the aggregate of the Preference Shares to be redeemed bears to the aggregate of the Preference Shares in issue immediately prior to the date on which redemption is to take place; [18.104.22.168 Any premium arising on redemption shall be treated as a distribution for tax purposes and the Company will make no application under S.225 Income and Corporation Taxes Act 1988 in respect of it.] 3. ISSUE OF SHARES 3.1 Notwithstanding any other provisions of these Articles the directors shall be bound to offer to any member of the Investor Co Group for the time being holding shares in the capital of the Company such a proportion of any shares forming part of the share capital of the Company which the directors determine to issue as the aggregate nominal value of shares in the share capital of the Company for the time being held by such member of the Investor Co Group bears to the total issued share capital of the Company immediately prior to the issue of the shares. Any shares issued to a member of the Investor Co Group pursuant to such offer shall be issued upon terms and conditions that are no less beneficial as to payment and otherwise than those made available to other shareholders or such other terms as Investor Co shall agree and so that such shares shall at the request of Investor Co be registered in the name or names of any one or more members of the Investor Co Group. Handbook of Venture Capital Documentation Page 170 4. CLASS RIGHTS 4.1 Whenever the capital of the Company is divided into different classes of shares the special rights attached to any class may be varied or abrogated either whilst the Company is a going concern or during or in contemplation of a winding up, with the consent in writing of the holders of 75% of the issued shares of that class. Without prejudice to the generality of this Article, the special rights attached to the Preference Shares and the „A‟ Ordinary Shares shall be deemed to be varied:- 4.1.1 by the grant of any option or other right to subscribe for shares and by any alteration or increase or reduction or sub-division or consolidation of the authorised or issued capital of the Company or of any of its subsidiaries, or any variation of the rights attached to any of the shares for the time being in the capital of the Company or of any of its subsidiaries; or 4.1.2 by the disposal of the undertaking of the Company or of any of its subsidiaries or any substantial part thereof or by the disposal of any share in the capital of any subsidiary of the Company; or 4.1.3 by the acquisition of any interest in any share in the capital of any company by the Company or any of its subsidiaries; or 4.1.4 by the application by way of capitalisation of any sum in or towards paying up any debenture or debenture stock of the Company; or 4.1.5 by any alteration of the restrictions on the powers of the directors of the Company and its subsidiaries to borrow, give guarantees or create charges; or 4.1.6 by the winding up of the Company; or 4.1.7 the redemption of any of the Company‟s shares (otherwise than pursuant to these articles) or by the entering into of a contract by the Company to purchase any of its shares; or 4.1.8 by any alteration of the Company‟s memorandum or articles of association; or Handbook of Venture Capital Documentation Page 171 4.1.9 by any alteration of the Company‟s accounting reference date; or 4.1.10 by the entering into of a written service agreement with any director or Connected Person of such director or the material variation of any such existing service agreement with any such person; or 4.1.11 by the calling of a meeting of the Company to effect or approve any matter which would by virtue of this article be a variation of the class rights of the „A‟ Ordinary and Preference Shares. 5. TRANSFER OF Investor Co SHARES Notwithstanding any other provisions of these Articles a transfer of shares in the Company held by any member of the Investor Co Group may be made between the member of the Investor Co Group holding such shares and any other member of the Investor Co Group without restriction as to price or otherwise and the directors shall register any such transfer. 6. TRANSFER OF SHARES - GENERAL The directors shall refuse to register any transfer of shares made in contravention of the provisions of these Articles but (subject to Regulation 24 of Table A) shall not otherwise be entitled to refuse to register (and shall register) any transfer of shares. For the purpose of ensuring that a particular transfer of shares is permitted under the provisions of these Articles, the directors may request the transferor, or the person named as the transferee in any transfer lodged for registration to furnish the Company with such information and evidence as the directors may reasonably think necessary or relevant. Failing such information or evidence being furnished to the satisfaction of the directors within a period of 28 days after such request the directors shall be entitled to refuse to register the transfer in question. 7 TRANSFERS TO PRIVILEGED RELATIONS AND FAMILY TRUSTS 7.1 Notwithstanding any other provision in these Articles any member may at any time transfer (or by will bequeath or otherwise dispose of on death) all or any shares held by him to a Privileged Relation, or to trustees to be held upon a Family Trust provided that any transfer of shares to trustees to be held upon a Family Trust made during the Handbook of Venture Capital Documentation Page 172 lifetime of such member may only be made with the consent in writing of the holders of 75% of the Preference Shares and the holders of 75% of the „A‟ Ordinary Shares, such consent not to be unreasonably withheld or delayed. 7.2 Where the consent of the holders of Preference Shares and „A‟ Ordinary Shares is requested to a transfer to a Family Trust such consent shall be given when the holders of such shares acting reasonably are satisfied:- 7.2.1 with the terms of the trust instrument and in particular with the powers of the trustees; 7.2.2 with the identity of the proposed trustees; 7.2.3 that the proposed transfer will not result in 50% or more in the aggregate of the Company‟s equity share capital (as defined in S744 of the Act) being held by trustees of that and any other trusts; and 7.2.4 that no costs incurred in connection with the setting up or administration of the Family Trust in question are to be paid by the Company. 7.3 Where any shares are held by trustees upon a Family Trust:- 7.3.1 on any change of trustees such shares may be transferred to the new trustees of that Family Trust; 7.3.2 such shares may be transferred at any time to the settlor or to another Family Trust of the settlor or to any Privileged Relation of the settlor; 7.3.3 if and whenever any such shares cease to be held upon a Family Trust (otherwise than in consequence of a transfer to the settlor or to another Family Trust of the settlor or to any Privileged Relation of the settlor) a Transfer Notice (as hereinafter defined) shall be deemed to have been given in respect of the relevant shares (as hereinafter defined) and such shares may not otherwise be transferred); and 7.3.4 for the purposes of this Article 7.3 the expression „relevant shares‟ means and includes the shares originally transferred to the trustees and any additional shares issued or transferred to the trustees by virtue of the holding of those shares or any of them. Handbook of Venture Capital Documentation Page 173 TRANSFERS BY EMPLOYEE MEMBERS 8.1 If any person holding shares in the capital of the Company and being an employee or director of the Company or its subsidiaries (an „Employee Member‟) ceases to be an employee or director of the Company or its subsidiaries, and does not forthwith become or continue to be an employee or director of any of the Company or its subsidiaries a Transfer Notice (as hereinafter defined) shall be deemed to have been served (hereinafter referred to as a “deemed Transfer Notice”) forthwith upon such cessation in respect of:- 8.1.1 all shares held by the Employee Member; and 8.1.2 all shares held by his Privileged Relations and/or Family Trusts at the time of such cessation. TRANSFER PROVISIONS 9.1 Save as otherwise provided in these Articles every member who desires to transfer any shares (hereinafter called „the Vendor‟) shall give to the Company notice in writing of such desire (hereinafter called a „Transfer Notice‟). Subject as hereinafter mentioned a Transfer Notice shall constitute the Company the Vendor‟s agent for the sale of the shares specified therein (hereinafter called „the Sale Shares‟) in one or more lots at the discretion of the directors to all the holders of „A‟ Ordinary and Ordinary Shares in the Company (such shares being hereinafter in this Article 9 referred to as „Equity Shares‟) other than the Vendor at the Sale Price. The Sale Price shall be the price agreed by the Vendor and the directors or if the Vendor and the directors are unable to agree a price within 28 days of the Transfer Notice being given or if the Transfer Notice is a deemed Transfer Notice the price which a chartered accountant (acting as an expert and not as an arbiter) nominated by agreement between the Vendor and the Company or in default of such agreement by the President for the time being of the Institute of Chartered Accountants of Scotland shall by writing under his hand certify to be in his opinion a fair value thereof on a going concern basis as between a willing seller and a willing buyer ignoring any reduction in value which may be ascribed to the Sale Shares by virtue of the fact that they represent a minority interest and on the assumption that the Sale Shares are capable of transfer without restriction. Save for shares sold pursuant to a deemed Handbook of Venture Capital Documentation Page 174 Transfer Notice the Transfer Notice may contain a provision that unless all the shares comprised therein are sold by the Company pursuant to this Article 9 none shall be sold and any such provision shall be binding on the Company. 9.2 If a chartered accountant is asked to certify the fair value as aforesaid his certificate shall be delivered to the Company and as soon as the Company receives the certificate it shall furnish a certified copy thereof to the Vendor and save for shares sold pursuant to a deemed Transfer Notice the Vendor shall be entitled by notice in writing given to the Company within ten days of the service upon him of the certified copy to cancel the Company‟s authority to sell the Sale Shares. The cost of obtaining the certificate shall be borne by the Company unless the Vendor shall give notice of cancellation as aforesaid in which case the Vendor shall bear the cost. 9.3 Upon the price being fixed as aforesaid and provided the Vendor shall not give a valid notice of cancellation the Company shall forthwith offer the Sale Shares to all holders of Equity Shares (other than the Vendor) pro rata as nearly as may be in proportion to the existing numbers of Equity Shares held by such members giving details of the number and the Sale Price of such Sale Shares. The Company shall invite each such member as aforesaid to state in writing within twenty-one days from the date of the notice whether he is willing to purchase any of the Sale Shares so offered to him and if so the maximum thereof which he is willing to purchase. If at the expiration of the said period of twenty-one days there are any Sale Shares offered which any of the members hereinbefore mentioned have not so stated their willingness to purchase the Company shall offer such shares to such members as have stated in writing their willingness to purchase all the shares previously offered to them. Such remaining shares shall be offered pro rata as nearly as may be in proportion to existing numbers of Equity Shares then held by such members which offer shall remain open for a further period of twenty-one days. 9.4 If the Company shall pursuant to the above provisions of this Article 9 find a member or members of the Company willing to purchase all or any of the Sale Shares the Vendor shall be bound upon receipt of the Sale Price to transfer the Sale Shares (or such of the same for which the Company shall have found a purchaser or purchasers) to such persons. If the Vendor shall make default in so doing the Handbook of Venture Capital Documentation Page 175 Company shall if so required by the person or persons willing to purchase such Sale Shares receive and give a good discharge for the purchase money on behalf of the Vendor and shall authorise some person to execute transfers of the Sale Shares in favour of the purchasers and shall enter the names of the purchasers in the Register of Members as the holders of such of the Sale Shares as shall have been transferred to them as aforesaid. 9.5 If the directors shall not have found a member or members of the Company willing to purchase all of the Sale Shares pursuant to the foregoing provisions of this Article 9 the Vendor shall at any time within six months after the final offer by the Company to its members be at liberty to sell and transfer such of the Sale Shares as have not been so sold to any person at a price being no less than the Sale Price. 9.6 If a member being a company ceases to be within the Control (as „Control‟ is defined by Section 840 of the Income and Corporation Taxes Act 1988) of the person(s) who controlled such company on the date on which it became a member of the Company or on the date of adoption of these Articles (whichever shall be the later) it shall be deemed to have immediately given a Transfer Notice in respect of all the shares as shall then be registered in its name; provided that this Article 9.6 shall have no application to Investor Co or to any member of the Investor Co Group. 9.7 The foregoing provisions of this Article 9 shall not apply to a transfer if the holders of 75% of the Ordinary Shares and the holders of 75% of the Preference Shares and the holders of 75% of the „A‟ Ordinary Shares so direct in writing and the directors shall be obliged to register any such transfer. 9.8 A Transfer Notice shall be deemed to have been given to the Company by any member who purports to transfer any shares other than in accordance with these Articles without giving a Transfer Notice to the Company and, in those circumstances, the deemed Transfer Notice shall:- 9.8.1 be deemed to apply to the number and class of shares purported to have been transferred; 9.8.2 entitle the Company to require delivery to it of the certificate for the shares purported to have been transferred Handbook of Venture Capital Documentation Page 176 and, where the context admits, references in these Articles to a Transfer Notice shall include a deemed Transfer Notice and references in these Articles to a Vendor shall include a member deemed to have served a Transfer Notice. LIMITATION ON TRANSFER Notwithstanding any other provision of these Articles to the contrary, no sale or transfer of the legal or beneficial interest in any shares in the share capital of the Company shall be made or registered if as a result of such sale or transfer and registration thereof Control (as hereinbefore defined) would be obtained in the Company by a company or by a person or persons not in Control of the Company on the date of adoption of these Articles without the previous written consent of [the holders of the Preference Shares and] the holders of the „A‟ Ordinary Shares and unless:- 10.1.1 Investor Co has received prior written notice of such sale or transfer [and has not less than twenty- one days to exercise the Investor Co Option (if not already exercised)]; and 10.1.2 [after the expiry of such twenty-one day period and] before the transfer is lodged for registration the proposed transferee or transferees or his or their nominees has or have offered to purchase (i) all the Preference Shares at a price per share of EUR [ ] [plus a cash premium of [ ]p] and all arrears and accruals of the dividends payable on such shares calculated down to the date of sale or transfer and the tax credits (if any) that relate to such dividends [and the cash premium] and (ii) all the „A‟ Ordinary Shares at the Specified Price (as hereinafter defined), and such offer shall have remained open for acceptance for a period of at least twenty-one days. 10.2 The expression “the Specified Price” shall mean the higher of:- (i) a price per share of EUR 1.00 plus (a) a sum equal to any arrears, deficiency and accruals of the dividends payable on such share calculated down to the date of sale or transfer and (b) all the tax credits that would have related to such dividends if such dividends had been paid; and (ii) a price per share at least equal to that offered or paid or payable by the proposed transferee or transferees or his or their nominees for any other shares Handbook of Venture Capital Documentation Page 177 in the capital of the Company plus an amount equal to the relevant proportion of any other consideration (in cash or otherwise) received or receivable by the holders of such shares which having regard to the substance of the transaction as a whole can reasonably be regarded as an addition to the price paid or payable for such shares, provided that if any part of the price per share is payable otherwise than by cash the transferor may at its option elect to take a price per share of such cash sum as may be agreed by it having regard to the substance of the transaction as a whole. In the event of disagreement the calculation of the Specified Price shall be referred to an umpire, who shall act as an expert and not as an arbiter and shall be nominated by the parties concerned or failing agreement as to such nomination shall be appointed by the President for the time being of the Institute of Chartered Accountants of Scotland and the decision of such umpire shall be final and binding. 10.3 All other regulations of the Company relating to the transfer of shares and the right to registration of transfers shall be read subject to the provisions of this Article 10. VOTING RIGHTS Subject to any special rights or restrictions as to voting attached to any shares by or in accordance with these Articles, on a show of hands every member who (being an individual) is present in person or (being a corporation) is present by a representative not being himself a member, shall have one vote, and on a poll every member who is present in person or by proxy or (being a corporation) is present by a representative shall have one vote for every share in the capital of the Company of which he is the holder; Provided that the holders of Preference Shares shall be entitled to receive copies of circulars to shareholders and debenture holders and to receive notice of and to attend all General Meetings of the Company [but not to vote thereat] [but only to vote in respect of such Preference Shares if the Preference or Participating Preference Dividends are in arrears or if the redemption of Preference Shares is in arrears or if the Company or the directors of the Company shall have committed a material breach of [the Investment Offer] or if any sum owed to a third party shall have become due and payable before the original due date for payment.] Handbook of Venture Capital Documentation Page 178 SPECIAL DIRECTOR 12.1 Notwithstanding any limitation on the number of directors imposed by these Articles from time to time so long as any member of the Investor Co Group is the holder of any share in the capital of the Company, Investor Co shall be entitled to appoint as a director of the Company any person who shall, if Investor Co so require be Chairman of the Board of Directors and to remove from office any person so appointed and to appoint another person in his place. Any appointment or removal in terms of this paragraph shall be effected by notice in writing signed by Investor Co and delivered to the registered office of the Company. The director appointed in terms of this Article shall not be required to hold any share qualification nor shall he be subject to retirement by rotation and the remuneration to be paid to him shall be payable by the Company and shall be such sum as shall for the time being be agreed for that purpose between the Company and him or failing such agreement such reasonable sum as shall be fixed by WLVF. Upon request by Investor Co the Company shall also procure that a director appointed in terms of this paragraph be appointed a director to any subsidiary of the Company. Regulation 91 of Table A shall be modified accordingly. APPOINTMENT OF DIRECTORS 13.1 The maximum number of directors at any one time holding office shall be [ ] and the minimum number [ ]. 13.2 The directors may appoint a person who is willing to act to be a director, either to fill a vacancy or as an additional director. In addition, the holders of shares representing more than half of the shares which carry the right to attend and vote at general meetings of the Company may by notice to the Company together appoint a person who is willing to act to be a director either to fill a vacancy or as an additional director. PROCEEDINGS OF DIRECTORS Notice of every meeting of the directors shall be given to each director at any address supplied by him to the Company for that purpose whether or not he be present in the United Kingdom provided that any director may waive notice of any Handbook of Venture Capital Documentation Page 179 meeting either prospectively or retrospectively and if he shall do so it shall be no objection to the validity of such meeting that notice was not given to him. DIRECTORS INTERESTS 15.1 Subject to the provisions of the Act and provided that he has disclosed to the directors the nature and extent of any material interest of his, a director notwithstanding his office:- 15.1.1 may be a party to or otherwise interested in any transaction or arrangement with the Company or in which the Company is in any way interested; 15.1.2 may be a director or other officer of or employed by or be a party to any transaction or arrangement with or otherwise interested in any body corporate promoted by the Company or in which the Company is in any way interested; 15.1.3 may (and any firm or company of which he is a partner or member or director may) act in a professional capacity for the Company or any body corporate in which the Company is in any way interested; 15.1.4 shall not by reason of his office be accountable to the Company for any benefit which he derives from such office, service or employment or from any such transaction or arrangement or from any interest in any such body corporate and no such transaction or arrangement shall be liable to be avoided on the ground of any such interest or benefit; and 15.1.5 shall be entitled to vote and be counted in the quorum on any matter concerning the foregoing paragraphs of this article. 15.2 For the purpose of this article: 15.2.1 a general notice to the directors that a director is to be regarded as having an interest of the nature and extent specified in the notice in any transaction or arrangement in which a specified person or class of persons is interested shall be deemed to be a disclosure that the director has an interest in any such transaction of the nature and extent so specified; Handbook of Venture Capital Documentation Page 180 15.2.2 an interest of which a director has no knowledge and of which it is unreasonable to expect him to have knowledge shall not be treated as an interest of his; and 15.2.3 an interest of a person who is for any purpose of the Act (excluding any statutory modification not in force when these Articles were adopted) connected with a director shall be treated as an interest of the director and in relation to an alternate director an interest of his appointor shall be treated as an interest of the alternate director without prejudice to any interest which the alternate director has otherwise. DIRECTORS‟ BORROWING POWERS 16.1 Subject as hereinafter provided the directors may exercise all the powers of the Company (whether express or implied):- 16.1.1 of borrowing or securing the payment of money; 16.1.2 of guaranteeing the payment of money and the fulfilment of obligations and the performance of contracts; and 16.1.3 of mortgaging or charging the property assets and uncalled capital of the Company and (subject to section 80 of the Act) of issuing debentures but so that:- 16.1.4 the directors of the Company shall procure that the aggregate amounts for the time being remaining undischarged by virtue of any of the foregoing operations by the Company and all subsidiaries of the Company and by virtue of any like operations by the Company and all subsidiaries of the Company (including any liability (whether ascertained or contingent) under any guarantee for the time being in force and including amounts due under any hire purchase, credit sale, conditional sale or leasing agreements (other than leases of real or heritable property) which can in accordance with current accounting practice be attributed to capital but excluding inter-company loans, mortgages and charges) shall not without the previous sanction of the „A‟ Ordinary Shareholders and Handbook of Venture Capital Documentation Page 181 the Preference Shareholders exceed a sum which is [the greater of EUR [ ]or [ ] the aggregate of the nominal amount of the share capital of the Company for the time being issued and paid up or credited as paid up and the amounts for the time being standing to the credit of the capital and revenue reserves and the share premium account of the Company and all its subsidiaries (excluding any amounts arising from the writing up of the book values of any capital assets, any amounts attributable to goodwill, and minority interests and any amounts set aside for future taxation) all as shown by the then latest audited consolidated balance sheet of the Company]; 16.1.5 no such sanction shall be required to the borrowing of any sum of money intended to be applied in the repayment (with or without premium) of any moneys then already borrowed and outstanding, notwithstanding that the same may result in such limit being exceeded; 16.1.6 no lender or other person dealing with the Company shall be concerned to see or enquire whether the limit imposed by this Article 16 is observed and no debt or liability incurred in excess of such limit shall be invalid and no security given for the same shall be invalid or ineffectual except in the case of express notice to the lender or recipient of the security or person to whom the liability is incurred at the time when the debt or liability was incurred or the security given that the limit hereby imposed has been or was thereby exceeded; 16.1.7 except with the previous sanction of the holders of 75% of the „A‟ Ordinary Shares and the holders of 75% of the Preference Shares no mortgage or charge shall be created on any part of the undertaking, property or assets of the Company or any subsidiary of the Company except for the purpose of securing moneys borrowed from any member of the Investor Co Group with interest thereon and from bankers with interest thereon and bank charges. Handbook of Venture Capital Documentation Page 182 INDEMNITY Subject to the provisions of the Act but without prejudice to any indemnity to which a director may otherwise be entitled, every director or other officer or auditor of the Company shall be indemnified out of the assets of the Company against all costs, charges, losses, expenses and liabilities incurred by him in the execution of his duties or in relation thereto including any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgement is given in his favour or in which he is acquitted or the proceedings are otherwise disposed of without any finding or admission of any material breach of duty on his part or in connection with any application in which relief is granted to him by the court from liability for negligence, default, breach of duty or breach of trust in relation to the affairs of the Company. THE COMPANIES ACT 1985 COMPANY LIMITED BY SHARES NEW ARTICLES OF ASSOCIATION of [ ] LIMITED Solicitor Co (place) [Investor Co Style Articles] Handbook of Venture Capital Documentation Page 183 DOCUMENT NUMBER 23 DOCUMENT TITLE EASY-LOAN AGREEMENT PURPOSE OF An example of low transaction cost loans provided by venture firms DOCUMENT often in association with development agencies or councils to early stage companies or for proof of concept. Sometimes instead of or in addition to repayment there is an option or conversion of loan to equity clause. LOAN AGREEMENT between Investor Co incorporated under the Companies Acts registered number xxxxxxx and having its Registered Office at ……. a place …….(hereinafter referred to as 'the Lender') OF THE FIRST PART and (hereinafter referred to as 'the Borrowers') OF THE SECOND PART ____________________________ WHEREAS the Lender has agreed to lend to the Borrowers the sum of ( EUR ) STERLING on the terms and conditions hereinafter provided NOW THEREFORE IT IS AGREED BETWEEN THE PARTIES AS FOLLOWS:- ONE DEFINITIONS 'the Loan' shall mean the said sum of ( ) Pounds Sterling to be lent by the Lender to the Borrowers in terms of this Agreement; The headings in this Agreement are inserted for convenience only and shall be disregarded for the purposes of construing this Agreement. Words importing the singular shall include the plural and vice versa and words in the masculine shall include the feminine and neuter; References to persons shall include individuals, firms and corporations. Handbook of Venture Capital Documentation Page 184 TWO THE LOAN As at the date of execution hereof, the Lender shall advance the sum of EUR 5,000 to the Borrowers by way of cheque in favour of the Borrowers, which cheque shall be used for the sole purpose of working capital for the business. THREE INTEREST Interest on the average amount of the Loan outstanding during each quarter year following the date hereof shall be paid quarter-yearly in arrears by the Borrowers to the Lender at the annual rate of three per centum per annum above the base rate from time to time of the Bank Co. Interest as aforesaid shall be calculated on a daily basis. Interest shall accrue as aforesaid on any amount of interest on the Loan not paid within seven days of the relevant quarterly date as hereinbefore provided. A statement of the Lender as to the amount of interest payable pursuant to this clause shall in the absence of manifest error be conclusive and binding on the parties. FOUR REPAYMENT The Loan together with accrued interest shall be repayable by the Borrowers to the Lender upon demand from the Lender by notice in writing specifying the date of repayment (being no earlier than 24 hours after the date of the notice). FIVE REPRESENTATIONS AND WARRANTIES The Borrowers hereby represent and warrant to the Lender that neither the execution and delivery of this Agreement by the Borrowers nor the performance or observance of any of its obligations under this Agreement will conflict with or result in any breach of any law, statutory regulation debenture, mortgage, trust deed or other instrument, arrangement, obligation or duty by which the Borrowers are bound. SIX PAYMENT All sums payable by the Borrowers under this Agreement shall be paid in full without any set off or claim and (save insofar as required by law to the contrary) free and clear of and without any deduction or withholding whatsoever. If the Borrowers are at Handbook of Venture Capital Documentation Page 185 any time required by law to make any deduction or withholding of any payment to the Lender then the Borrowers will immediately pay to the Lender such additional amounts as will result in the Lender receiving the full amount it would have received had no such deduction or withholding been required and will simultaneously provide the Lender with a certificate of deduction or withholding in respect of the amount deducted or withheld together with evidence satisfactory to the Lender that the amount to be deducted or withheld has been paid over to the relevant authorities when and as due. SEVEN ASSIGNATION The Lender shall be entitled to assign this Agreement and its rights thereunder. The Borrowers may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Lender. EIGHT REGISTRATION The Lender and the Borrowers consent to the registration of this agreement for preservation and execution. NINE GOVERNING LAW This Agreement shall be governed by and construed in all respects in accordance with the Law of Scotland: IN WITNESS WHEREOF: .......................................... Date ............................ (COMPANY) .......................................... Date ............................ (DIRECTOR) .......................................... Date ............................ (DIRECTOR) ..........................................DIRECTOR Date ............................ Investor Co LIMITED Handbook of Venture Capital Documentation Page 186 DOCUMENT NUMBER 24 DOCUMENT TITLE FAST TRACK LOAN PURPOSE OF SEE DOCUMENT 23 DOCUMENT EXAMPLE OF USE STANDARD DOCUMENT KEY SENSITIVITIES WHERE SMALL START-UP LOANS ARE MADE BY VCS, THESE ARE OFTEN PART OF A PUBLICLY SUBSIDISED ECONOMIC DEVELOPMENT PROGRAMME. VCS PREFER EQUITY WHERE THERE IS SOME CHANCE OF AN UPSIDE, IF THE INVESTMENT TAKES OFF. LOAN AGREEMENT between Investor Co, incorporated under the Companies Acts registered number xxxxxxx and having its Registered Office at (place) (hereinafter referred to as 'the Lender') OF THE FIRST PART and (hereinafter referred to as 'the Borrower') OF THE SECOND PART ____________________________ WHEREAS the Lender has agreed to lend to the Borrower the sum of five thousand pounds (£ 5,000 ) STERLING on the terms and conditions hereinafter provided NOW THEREFORE IT IS AGREED BETWEEN THE PARTIES AS FOLLOWS:- ONE DEFINITIONS 'the Loan' shall mean the said sum of five thousand pounds sterling (£5,000) to be lent by the Lender to the Borrower in terms of this Agreement; TWO THE LOAN At the date of execution hereof, the Lender shall advance the sum of five thousand pounds (£5,000) to the Borrower by way of cheque in favour of the Borrower, which cheque shall be used for the sole purpose of working capital for the business. Handbook of Venture Capital Documentation Page 187 THREE INTEREST Interest on the average amount of the Loan outstanding during each quarter year following the date hereof shall be paid by the Borrower to the Lender in arrears on 31 March, 30 June, 30 September and 31 December at the annual rate of eight per cent per annum. Interest as aforesaid shall be calculated on a daily basis. Interest shall accrue as aforesaid on any amount of interest on the Loan not paid within seven days of the relevant quarterly date as hereinbefore provided. A statement of the Lender as to the amount of interest payable pursuant to this clause shall in the absence of manifest error be conclusive and binding on the parties. The Borrower shall pay interest net of tax in accordance with Section 349 (2) of the Income and Corporation Taxes Act 1988 and shall provide the Lender with a certificate of tax in accordance with Section 352 of that Act FOUR REPAYMENT The Borrower undertakes to repay the Loan to the Lender or to their successors or assignees whomsoever by one monthly payment of two hundred and sixteen pounds sterling (£216) followed by twenty three monthly payments of two hundred and eight pounds sterling (£208) commencing on the first day of ( ). All repayments shall be made by Banker‟s Standing Order. The outstanding balance of the Loan together with any accrued interest shall immediately become due and payable by the Borrower to the Lender in the event that 1. the Borrower defaults on any Repayment or Interest payments 2. the Loan is used for any other purpose than that specified 3. the Borrower is unable to pay its debts as they fall due Handbook of Venture Capital Documentation Page 188 4. the Borrower ceases to trade or an order is made or an effective resolution is passed for winding up of the Borrower 5. the Borrower ceases to trade from premises with West Lothian No failure on the part of the Lender to exercise or delay on the part of the Lender in exercising any right to repayment shall operate as a waiver thereof All sums payable by the Borrower under this Agreement shall be paid in full without any set off or claim and (save insofar as required by law to the contrary) free and clear of and without any deduction or withholding whatsoever.. FIVE REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants to the Lender that neither the execution and delivery of this Agreement by the Borrower nor the performance or observance of any of its obligations under this Agreement will conflict with or result in any breach of any law, statutory regulation, debenture, mortgage, trust deed or other instrument, arrangement, obligation or duty by which the Borrower is bound. SIX INFORMATION While any part of the Loan or Interest payment remains outstanding, the Borrower will give to the Borrower within four weeks of each month end, copies of its monthly management accounts and within four months of each financial year end, copies of its audited financial statements. SEVEN ASSIGNATION The Lender shall be entitled to assign this Agreement and its rights thereunder. The Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Lender. EIGHT REGISTRATION The Lender and the Borrower consent to the registration of this agreement for preservation and execution. Handbook of Venture Capital Documentation Page 189 NINE GOVERNING LAW This Agreement shall be governed by and construed in all respects in accordance with the Law of Scotland: IN WITNESS WHEREOF: For and on behalf of ( ) Director………………………………………… Witness …………………………….. Name ...................................... ............... Director ………………………………………….. Address ………………………………………. ………………………………………. Occupation…………………………. For and behalf of Investor Co Witness ...................................... ......... Director…………………………………………… Name ………………………………… Address ...................................... ............... Occupation………………………….. ...................................... ............... Handbook of Venture Capital Documentation Page 190 DOCUMENT NUMBER 25 DOCUMENT TITLE FLOATING CHARGE PURPOSE OF This is a security instrument arranging preference over ordinary DOCUMENT creditors in the event of insolvency of New Co EXAMPLE OF USE Almost always used in conjunction with a loan BOND AND FLOATING CHARGE in favour of INVESTOR CO by ( ) PAYMENT OBLIGATION WE, ( ) having our registered office at ( ) and our registered number being ( ) (hereinafter called „the Company‟) hereby undertake that we will on such date or dates as provided by Clause 2 hereof pay and discharge to Investor Co whose registered office is at (….. address….) (hereinafter called „Investor Co‟ which expression shall include assignees of Investor Co) all moneys and liabilities which are now or which at any time or times hereafter may become due or owing or incurred to Investor Co by the Company in any manner whatever whether actually or contingently and whether as principle or cautioner or guarantor or surety or otherwise howsoever including without prejudice to the foregoing generality all interest thereon at such rate as may be agreed in writing from time to time between the Company and Investor Co whether before or after the execution hereof and together also with all charges costs and expenses payable in connection with enforcing or obtaining payment of the moneys hereby secured. PAYMENT DATE ALL or any moneys and liabilities due or owing or incurred by the Company to Investor Co shall be repaid or discharged by the Company on demand unless otherwise agreed in writing from time to time between the Company and Investor Co whether before or after the execution hereof (such agreement or agreements in writing being hereinafter together referred to as „the Agreement‟) Handbook of Venture Capital Documentation Page 191 CHARGING CLAUSE THE Company hereby in security of the payment and discharge to Investor Co of all moneys and liabilities hereby undertaken to be paid and discharged to Investor Co and all other sums intended to be hereby secured grants in favour of Investor Co a floating charge over the whole of the property (including uncalled capital) which is or may be from time to time while these presents are in force comprised in the property and undertaking of the Company (such property and undertaking hereby charged being hereinafter referred to as „the Property‟) PRIORITY THE charge created hereby shall (unless otherwise agreed in writing by Investor Co either before or after the date hereof) be a first charge and the Company shall not (without the previous written consent of Investor Co) [and subject to the ranking agreement (“the Ranking Agreement”) to be executed by the Company contemporaneously herewith] create subsequent to the date hereof any fixed security or any other floating charge (as defined by the Companies Act 1985) having priority over or ranking pari passu with the floating charge hereby created excepting any standard security or other fixed security which may be subsequent to the date of these presents be granted by the Company in favour of Investor Co which shall have priority over the floating charge hereby created. CERTIFICATE OF AMOUNT DUE ANY account or certificate signed by an authorised signatory of Investor Co shall in the absence of manifest error conclusively determine the amount from time to time secured hereby. OBLIGATIONS OF THE COMPANY TO INSURE THE Company shall: insure and keep insured such of the Property as is of an insurable nature against loss or damage by normal commercial risks (and such other risks as may reasonably be required by Investor Co) for such sum and in such manner as shall from time to time be approved in writing by Investor Co and such insurance shall be effected in such office and generally in such manner as Investor Co shall approve and the Company shall cause notice of the interest of Investor Co to be noted on the policies and the Company shall duly pay the premiums and other sums of money payable in respect of any such insurance and immediately after every such payment produce to Investor Co on demand the receipt for the same and all moneys which may at any time hereafter be received or receivable Handbook of Venture Capital Documentation Page 192 under any insurance in respect of the Property whether or not effected pursuant to the foregoing provision shall be applied in replacing restoring or reinstating the property destroyed or damaged or in such other manner as Investor Co shall direct; and effect and maintain or cause to be effected and maintained such other insurances as are normally maintained by prudent companies carrying on comparable businesses. RIGHT TO SERVE A DEMAND FOR REPAYMENT IN respect of any moneys or liabilities due owing or incurred by the Company to Investor Co which by virtue of the Agreement are to be discharged otherwise than on demand Investor Co shall nevertheless be entitled by notice to the Company to demand the payment and discharge thereof (or any part thereof) together with all interest and any other sums forthwith (or otherwise as Investor Co may require) at any time after the happening of any of the following events:- if the Company makes default in the payment on the due date of any money which may have become due hereunder or under the Agreement or any deed or document supplemented hereto or thereto; or if any inhibition arrestment (other than an inhibition or arrestment on the dependence of an action or an arrestment to found jurisdiction) charge or other process is threatened placed or enforced against all or any of the property of the Company or any company or individual who has guaranteed or become surety for repayment of all or any part of the moneys and liabilities hereby secured (hereinafter referred to as „a Guarantor‟) or Investor Co is of the opinion that such property is otherwise in jeopardy; or if the Company or a Guarantor is unable to pay its debts within the meaning of section 123 on the Insolvency Act 1986 or certifies that it is unable to pay its debts as and when they fall due or if an order is made or an effective resolution passed for winding up the Company or a Guarantor; or if a meeting of the Company or a Guarantor is convened for the purpose of considering a resolution for the winding up of the Company or of a Guarantor; or if an application is made to the Court for an order for the winding up of the Company or a Guarantor; or Handbook of Venture Capital Documentation Page 193 if the Company or a Guarantor ceases to carry on its business or substantially the whole of its business or threatens to cease to carry on the same or substantially changes the nature of its business; or if the holder of any security over the property or assets of the Company or a Guarantor takes possession of or a receiver is appointed over all or any property or assets of the Company or a Guarantor; or if a proposal is made to the Company and its creditors or a Guarantor and its creditors for a voluntary arrangement pursuant to section 1 of the Insolvency Act 1986; or if a petition is presented for an administration order to be made in relation to the Company or a Guarantor pursuant to the Insolvency Act 1986; or if the Company or a Guarantor fails to comply with any of the obligations conditions or provisions contained herein or in the Agreement or in any deed or document supplemental hereto or thereto or if any warranty given to Investor Co by the Company or by the directors of the Company or by a Guarantor proves to be materially incorrect or inaccurate; or if the Company or a Guarantor fails to comply with any of the obligations conditions or provision contained herein or in the Agreement or in any deed or document supplemental hereto or thereto or if any warranty given to Investor Co by the Company or by the directors of the Company or by a Guarantor proves to be materially incorrect or inaccurate; or if a Guarantor (being an individual) become apparently insolvent (within the meaning of the Bankruptcy (Scotland) Act 1985), or makes a composition contract or arrangement with his creditors, or if a judicial factor is appointed to his estate. Upon any demand being made for payment of any moneys such moneys shall become payable immediately and all rights of the Company to deal for any purpose whatsoever with the Property or any part thereof shall forthwith cease and Investor Co shall be relieved of any obligations to advance any moneys to the Company. WAIVERS NO delay by Investor Co in enforcing any of the terms and conditions of this charge nor the granting of any time or indulgence by Investor Co to the Company shall Handbook of Venture Capital Documentation Page 194 discharge or impair any of the rights and remedies of Investor Co hereunder nor shall any waiver granted by Investor Co in respect of any breach of this charge operate as a waiver or any subsequent breach thereof. APPOINTMENT OF RECEIVER AT anytime after the moneys hereby secured shall have become payable or at the request of the Company Investor Co shall be entitled at any time thereafter without further notice to the Company to appoint a receiver or receivers of the Property in terms of the Insolvency Act 1986; and, in addition, but without prejudice to the foregoing provisions of this clause, in the event that any person appointed in pursuance thereof to be a receiver as aforesaid shall be removed by the Court or shall otherwise cease to act as such Investor Co shall be entitled so to appoint in his place another person as receiver of the Property. POWERS OF RECEIVER A receiver so appointed shall have and be entitled to exercise all the powers conferred upon a receiver by the Insolvency Act 1986. COSTS THE Company shall be solely responsible for the acts and deeds of any receiver so shall have no liability or responsibility for or in respect of any act or default of such receiver or any such remuneration, costs, charges and expenses. INDEMNITY Investor Co and every receiver appointed by Investor Co hereunder shall be entitled to be indemnified by the Company in respect of all liabilities and expenses incurred by it or him in the execution or purported execution of any of the powers, authorities, or discretions vested in it or him in pursuance of the Insolvency Act 1986 or these presents and against all actions, proceedings, costs, claims and demands in respect of any matter or thing done or omitted in any way in connection with or relating to the Property and Investor Co and any such receiver may retain and pay all sums in respect of the same out of the moneys received under the powers conferred by the Insolvency Act 1986. NOTICES WHERE a notice is to be given to any party hereto it may be served by leaving it at the registered office of last known address of that party or by sending it first class letter post to the registered office or last known address of that party when it shall be deemed to have been served at the expiration of forty-eight hours after it has been posted or by transmitting it by telex to that party when it shall be deemed to have been served upon the correct „Answerback‟ appearing at the end of the sender‟s copy of the telex. Handbook of Venture Capital Documentation Page 195 INTERPRETATION ANY reference in these presents to a statute of a section of a statute shall be deemed to include a reference to any statutory modification or re-enactment thereof for the time being in force. REGISTRATION THE Company hereby consents to the registration hereof and of any certificate before mentioned for preservation and execution. IN WITNESS WHEREOF these presents are subscribed for an on behalf of the Company at………………………………………………………………………… on the…………………………………………..day of…………………………….1998 as follows:- …………………………………………………… Director …………………………………………………… Director/Secretary* Handbook of Venture Capital Documentation Page 196 DOCUMENT NUMBER 26 DOCUMENT TITLE RANKING AGREEMENT PURPOSE OF DOCUMENT Prioritises the order in which securities rank in the event of insolvency of New Co EXAMPLE OF USE Normally the first ranking security is the Bank KEY SENSITIVITIES In the absence of a Ranking Agreement in the UK, securities rank in the order in which they are lodged at Companies House. RANKING AGREEMENT among ( ) (No: ) whose registered office is at ( )(hereinafter „the Borrower‟) and Investor Co (No ) whose registered office is at …………… a place …………………… (hereinafter „Investor Co ‟) and ( ) (No: ) whose registered office is at ( )(hereinafter „the Bank‟) WHEREAS: (A) The Borrower has granted in favour of the Bank the Bank‟s Floating Charge (as hereinafter defined); (B) The Borrower has granted in favour of Investor Co the Investor Co Floating Charge (as hereinafter defined); and (C) The parties hereto have agreed to regulate the priority to be accorded to the Securities (as hereinafter defined). NOW THEREFORE IT IS HEREBY AGREED among the parties hereto as follows: Handbook of Venture Capital Documentation Page 197 1 (A) In this agreement unless the context otherwise requires:- ( i) „Creditors‟ shall mean Investor Co , and the Bank and „Creditor‟ shall mean either of the Creditors; ( ii) „the Bank‟s Floating Charge‟ shall mean the Floating Charge entered into by the Borrower in favour of the Bank dated [ ] [of even date with the Borrower‟s execution hereof] and [to be] registered with the Registrar of Companies in Edinburgh [on[ ]]; (iii) „the Bank‟s Priority Debt‟ shall mean ( )( )together with one year‟s interest thereon and the costs, charges and expenses of the Bank in relation thereto; (iv) „the Investor Co Floating Charge‟ shall mean the Bond and Floating Charge entered into by the Borrower in favour of Investor Co dated [ ][of even date with the Borrower‟s execution hereof] and [to be] registered with the Registrar of Companies in Edinburgh [on [ ]]; ( v) „the Investor Co Priority Debt‟ shall mean ( )( ) together with one year‟s interest thereon and the costs, charges and expenses of Investor Co in relation thereto; (vi) „Security‟ shall mean either of the Bank‟s Floating Charge and the Investor Co Floating Charge and a reference to „Securities‟ shall mean a reference to more than one security. (B) References in this Agreement to Investor Co and the Bank shall be deemed to include references to any assignees of and successors to the Securities. (C) References in this Agreement to any statute or statutory provision shall be deemed to include a reference to any statute or statutory provision which amends, extends, consolidates or replaces the same or which has been amended, extended, consolidated or replaced by the same and also to any order, regulation, instrument or other subordinate legislation made thereunder. 2 Notwithstanding the terms of the Bank‟s Floating Charge and Investor Co Floating Charge or the order in which they have been created or registered or any provisions as to ranking contained therein or the provisions of any instrument of alteration granted prior to the date hereof, the Securities shall rank in the following order of priority:- Handbook of Venture Capital Documentation Page 198 FIRST The Bank‟s Floating Charge to the extent of the Bank‟s Priority Debt shall rank before and in preference to any amount secured or to be secured by the Investor Co Floating Charge; SECOND The Investor Co Floating Charge to the extent of the Investor Co Priority Debt THIRD The Bank‟s Floating Charge in respect of all sums secured thereby in excess of the Bank‟s Priority Debt pari passu with the Investor Co Floating Charge in respect of all sums secured thereby in excess of the Investor Co Priority Debt. 3. Subject to the foregoing provisions, neither these presents nor either of the Securities shall in any way prejudice or affect the other Security for or in respect of any sum or sums due or which may become due by the Borrower to either of the Creditors and that notwithstanding the date or dates on which any sum or sums have been or shall be advanced by the Creditors to the Borrower or shall be drawn out by or debited to the Borrower all of which sums shall be as fully and effectually secured by the relative Securities as if for the purposes of the Agreement all such sums had become due to that Creditor before the granting of the other Security or these presents; and in particular but without prejudice to the foregoing, neither of the Securities nor these presents shall in any way prejudice or affect the security created by the Bank‟s Floating Charge of the Borrower‟s obligation to the Bank for or in respect of any operations which may hereafter take place on the Borrower‟s account or accounts with the Bank so that all sums placed or to be placed to the debit of the said account or accounts shall, subject to the above provisions as to ranking, be as fully and effectually secured by the Bank‟s Floating Charge as if the Investor Co Floating Charge had not been granted. 4. The Securities are hereby varied to the extent specified in Clause 2 hereof. This Agreement, so far as affecting the Securities, shall be construed and receive effect as an Instrument of Alteration within the meaning of Section 466 of the Companies Act 1985. 5. (A) In the event that either of the Creditors wishes at any time to appoint a Receiver, the Creditors shall consult together with a view to agreeing upon a suitable person to be appointed as such Receiver and such consultation and agreement shall also precede the appointment of any successor in that office and the removal of any such Receiver PROVIDED ALWAYS that nothing in this sub clause (A) of this Clause 5 shall prevent either of the Creditors from appointing a Receiver immediately if such Creditor deems it necessary or desirable to make such appointment. Handbook of Venture Capital Documentation Page 199 (B) In the event of the appointment of a Receiver pursuant to the proviso to sub clause (A) of this Clause 5, the Creditor appointing such Receiver shall, as soon as reasonably practical after such appointment, advise the other Creditor in writing of such appointment. If, in the event of the appointment of a Receiver or in the event of the liquidation of the Borrower, either of the Creditors receives any preferential payment in pursuance of Section 175 of the Insolvency Act 1986 such preferential payment shall be counted towards repayment of the Bank‟s Priority Debt or the Investor Co Priority Debt (as the case may be) before any other sums are counted towards payment of such debts. The Creditors hereby agree that if, for any reason other than the invalidity of either of the Securities, these presents are regarded by a liquidator or administrator or a receiver or receivers or any other manager for creditors of the Borrower as failing to bind him or them in the distribution of the proceeds of sale of the Borrower‟s assets, then effect shall be given thereto between the Creditors mutually by adjustment and/or appropriate payments made among them. Notwithstanding the terms of the Securities, each Creditor undertakes to the other Creditor that, so long as any debts shall remain secured by the respective Security of such other Creditor, neither Creditor shall, without the prior consent in writing of the other Creditor, require the Borrower to grant any further or other fixed security or securities whatsoever. The Borrower agrees that the Creditors shall be a liberty from time to time during the currency of either of the Securities to disclose to each other information concerning the Borrower (including, without prejudice to the foregoing generality, its assets, business and/or financial position) in such manner and to such extent as either Creditor shall from time to time decide. Each Creditor hereby consents to the subsistence and creation and acknowledges intimation of the registration of the Security of the other Creditor. The construction, validity and performance of this Agreement shall be governed by the Law of Scotland and the parties hereto agree to submit to the jurisdiction of the Scottish Courts. Handbook of Venture Capital Documentation Page 200 Except as varied by the terms of this Agreement, the whole of the Securities shall continue in full force and effect; these presents operate in substitution for the provisions of any Instrument of Alteration, Ranking Agreement and the like entered into among the Creditors or any of them in so far as such Instruments of Alteration, Ranking Agreements and the like are inconsistent with the provisions hereof. The Parties agree to registration hereof for preservation: IN WITNESS WHEREOF these presents are subscribed:- For and On Behalf of INVESTOR CO at…………………………………………………… on the………………………day of………………..19….by ……………………………………………………… Director ……………………………………………………….Director/Company Secretary For and On Behalf of the Bank Co at…………………………………………………… on the………………………day of………………..19….by ……………………………………………………… ………………………………………………………. For and On Behalf of the Borrower at…………………………………………………… on the………………………day of………………..19….by ……………………………………………………… Director ……………………………………………………… Director/Company Secretary Handbook of Venture Capital Documentation Page 201 DOCUMENT NUMBER 27 DOCUMENT TITLE OPTION AGREEMENT PURPOSE OF To identify share Optionholder in New Co DOCUMENT EXAMPLE OF USE This fairly standard examples lays out the circumstances, time and price at which share options can be exercised (or become invalidated) by management and investors. KEY SENSITIVITIES The Option Agreement will seek to keep management incentivised and (from the investor viewpoint) focus upon their exit route. 1 DEFINITIONS AND INTERPRETATION..................................... 203 2 OPTION....................................................................................... 204 3 EXERCISE .................................................................................. 205 4 COMPLETION ............................................................................ 205 5 PAYMENT ................................................................................... 206 6 FINANCIAL INFORMATION ....................................................... 206 7 UNDERTAKINGS ....................................................................... 206 8 WARRANTIES ............................................................................ 208 9 NEW SHAREHOLDERS ............................................................. 209 10 TRANSFER AND ASSIGNATION .............................................. 209 11 NOTICES .................................................................................... 209 12 DISPOSAL OF OPTION SHARES ............................................. 210 13 DURATION AND LAW................................................................ 210 PART 1 PART 2 PART 3 Handbook of Venture Capital Documentation Page 202 Final Draft _______________________________ OPTION AGREEMENT _______________________________ between NEW CO LIMITED BANK CO and THE SHAREHOLDERS OF NEW CO LIMITED Solicitor Co (place, date) Handbook of Venture Capital Documentation Page 203 This OPTION AGREEMENT is made among:- 1 NEW CO LIMITED (Company Number xxxxxxxx) and having its registered office at (place) (the "Company"); 2 BANK CO PLC , a company incorporated under the Companies Acts (registered number xxxxxx) and having its registered office at (place) (the "Optionholder"); 3 THE SHAREHOLDERS in the Company listed in Schedule 1 (the "Shareholders"); IT IS AGREED AS FOLLOWS: 1 DEFINITIONS AND INTERPRETATION 1.1 In this Agreement the following terms shall have the following meanings:- "Act" means the Companies Act 1985 as amended from time to time; "Articles of Association" means the articles of association of the Company as at the date of this Agreement; "Barker Option" means the Option letter to be dated on or about the date or dates of this Agreement to (name) conferring an option over 12,605 Ordinary Shares of 10p each in the capital of the Company; "Change of Control" means control of the Company passing to any person or persons, other than a shareholder in the Company at the date of the Company's execution of this Agreement ("control" having the meaning given to it in relation to a body corporate by section 840 of the Income and Corporation Taxes Act 1988); "Completion" means the performance by the Company and the Optionholder of the obligations assumed by them in Clause 4; "Conditional Option Notice" means a notice substantially in the form set out in Schedule Part 2 intimating an election by the Optionholder to exercise the Option in terms of Clause 3.2 conditionally upon a Listing or Change of Control taking place; "Employee Share Option Scheme" means the employee share option scheme established or to be established by the Company to confer options over 197,074 ordinary shares of 10p each in the capital of the Company; "Listing" means the admission of the whole or any part of the Company's Equity Share Capital to The London Stock Exchange Ltd or the obtaining of permission for dealings in its share capital on the Alternative Investment Market or any Handbook of Venture Capital Documentation Page 204 recognised investment exchange (as defined in Section 207 of the Financial Services Act 1986); "Option" means the subscription option granted to the Optionholder by this Agreement; "Option Notice" means a notice substantially in the form set out in Schedule Part 3 intimating the Optionholder's election to exercise the Option in terms of Clause 3.1; "Option Period" means the period from the Company's execution of this Agreement until:- (a) the date, if any, prior to the fifth anniversary of drawdown of the Loan (as defined in the loan Agreement) upon which any Listing or Change in Control occurs; or (if no such date) (b) the fifth anniversary of drawdown of the Loan (defined as aforesaid); or, if later (c) the first date after such fifth anniversary upon which either the Optionholder ceases to make available any facilities to the Company or a Listing or Change of Control occurs; "Option Price" means £50,000 in aggregate for the Option Shares; "Option Shares" means 80,000 A Ordinary Shares of £0.10 each in the share capital of the Company; "Schedules" shall be construed as a reference to the schedules to this Agreement; "Loan Agreement" means the loan agreement dated on or about the date of this Agreement between Bank Co plc and the Company; 1.2 References to this Agreement and to any provisions of it shall be construed as references to it in force for the time being and as amended, varied, supplemented, substituted or novated from time to time; 1.3 References to statutes, statutory provisions and other legislation shall include all amendments, modifications and re-enactments for the time being in force. 1.4 Words importing the singular are to include the plural and vice versa; 1.5 References to any person are to be construed to include that person's assignees or transferees or successors in title, whether direct or indirect; 1.6 Any term or phrase defined in the Companies Act 1985 (as amended from time to time) shall bear the same meaning in this Agreement; 1.7 Clause headings are for ease of reference only and are not to affect the interpretation of this Agreement. 2 OPTION 2.1 The Company grants to the Optionholder an option to elect to subscribe for the Option Shares at the Option Price at any time during the Option Period. Handbook of Venture Capital Documentation Page 205 2.2 In support of the Option, the Company shall deliver in a form and content acceptable to the Optionholder:- 2.2.1 an extract of its board resolution, certified by its secretary as true and complete, approving and authorising the execution of this Agreement; 2.2.2 an extract of an ordinary resolution of its shareholders dealing with the matters set out in sub-clause 8.3 below; and 2.2.3 an extract of the special resolution of its shareholders disapplying the shareholders' pre-emption rights in relation to the Option Shares as required pursuant to Section 95 of the Act. 3 EXERCISE 3.1 The Option may be exercised by the Optionholder serving an Option Notice on the Company specifying the number of Option Shares to be allotted and a date for Completion (which shall be a business day not less than 7 days nor more than 21 days after the date of service of the Option Notice). 3.2 The Option may be conditionally exercised following the advice or notice specified in Clause 6.2 being received by the Optionholder of a prospective Listing or Change of Control by the Optionholder serving on the Company a Conditional Option Notice specifying the number of Option Shares to be allotted. Completion (if it occurs) will then take place on or prior to the actual date of Listing or Change of Control provided that, if the Listing or Change of Control does not occur within 60 days of the date of the Conditional Option Notice it shall be deemed to be withdrawn. 3.3 Where a Conditional Option Notice is deemed to be withdrawn, the Option will remain in force and will be available for subsequent exercise by the Optionholder at any time during the Option Period, in accordance with the provisions of this Agreement. 3.4 For the avoidance of doubt, a Conditional Option Notice may be superseded at any time by the Optionholder issuing an Option Notice or further Conditional Option Notice. 3.5 If, before the expiry of the Option Period, an order is made or an effective resolution is passed for the winding up of the Company then if the Option has not been exercised, the Option shall be treated as if it had been so exercised and the Optionholder shall be entitled to receive out of the assets otherwise available to the Company's shareholders the amount to which it would then have been entitled, less the Option Price of the unissued Option Shares. The Option shall lapse on the effective winding up of the Company. Nothing in this sub-clause 3.5 shall in any way prejudice or affect the rights of the Optionholder in respect of Option Shares which have previously been issued to it. 4 COMPLETION 4.1 Completion will take place at the registered office of the Company (or as otherwise agreed) on the date determined for Completion in terms of Clause 3 (which will not be later than the date of any Listing or Change of Control). Handbook of Venture Capital Documentation Page 206 4.2 At Completion:- 4.2.1 the Optionholder will pay the Option Price to the Company; 4.2.2 the Company will allot and issue the Option Shares to the Optionholder (or its permitted nominee or assignee) and enter it as holder into its register of members; and 4.2.3 the Company will deliver to the Optionholder (or to its permitted nominee or assignee) an executed share certificate in respect of the Option Shares. 4.3 Upon allotment and issue of any of the Option Shares, the Company undertakes to immediately file all necessary returns with the Registrar of Companies and deliver copies of those filings to the Optionholder within 3 days of their being delivered to the Registrar of Companies. 4.4 All taxes and duties payable in respect of the issue of the Option Shares or relative filings shall be met by the Company unless it is prohibited by law from meeting those obligations. 5 PAYMENT 5.1 Any payment made by or to any party in relation to this Agreement shall be made either by:- 5.1.1 bank cheque or draft (as the payee may require ); or 5.1.2 by telegraphic transfer of funds into an account within the U.K. or nominated by the payee. 5.2 Should no election be made as to the manner or destination of a payment within 7 days, as the case may be, (a) after receipt by the Company of an Option Notice or (b) prior to Completion where a Conditional Option Notice is given, the payment shall be made by notice to the payee accompanied by a bankers draft. 6 FINANCIAL INFORMATION 6.1 The Company agrees and undertakes that prior to full exercise of the Option it shall promptly send or procure to be sent to the Optionholder copies of each of its audited accounts and copies of every statement, circular or notice issued to its shareholders. 6.2 The Company agrees and undertakes that, at all times prior to exercise of the Option the Company will give not less than 28 days prior written notice to the Optionholder of any prospective or possible Listing or Change of Control and will advise the Optionholder (on a confidential basis unless otherwise agreed) of all material developments in connection with such Listing or Change of Control and will promptly provide the Optionholder with all relevant financial particulars in relation to such Listing or Change of Control. 7 UNDERTAKINGS 7.1.1 The Company agrees and undertakes to procure that the Optionholder is given notice at the same time notice is given to the Shareholders, but in any event not less than 10 business days notice of any resolution to: Handbook of Venture Capital Documentation Page 207 (a) alter the rights attaching to the A Ordinary Shares in the capital of the Company; (b) to amend the Articles of Association in a manner which would be materially prejudicial to the interests of the Optionholder as holder of the Option; or (c) to grant options, warrants or rights to subscribe for or be allotted shares in the Company (other than the option conferred by the Barker Option or to be conferred by the Employee Share Option Scheme) 7.1.2 The Shareholders agree and undertake that for so long as the Option subsists with respect to any resolution contemplated by Clause 7.1.1 the Optionholder shall be entitled to attend the relevant meeting and vote as if the Option had been exercised and the Optionholder is the registered holder of the Option Shares and the Articles of Association shall be deemed varied to the extent required for this purpose. 7.1.3 The Option Shares and the Optionholder shall be included in the calculation of an Investor Majority (as defined in the Articles of Association) for the purpose of any resolution of the sorts contemplated by Clause 7.1.1(a). 7.1.4 Insofar as any of the provisions of the Articles of Association conflict with the terms of this Clause 7.1 the terms of this Clause 7.1 shall prevail for so long as the Option remains exercisable. 7.2 The Shareholders agree and undertake to exercise their rights as shareholders to vote their shares in order to ensure that there shall at all times be a sufficient number of suitable unissued shares to enable the Company to discharge its obligations under this Agreement. 7.3 The Company undertakes to the Optionholder (and each Shareholder agrees to exercise their powers and rights to procure insofar as reasonably practicable) that:- 7.3.1 where there is a potential Change of Control, the proposed transferee(s) of the applicable shares in the Company shall have offered to purchase all Option Shares registered in the name of the Optionholder or which the Optionholder may either conditionally or unconditionally be entitled to have allotted to it, at a price per Option Share equal to the greater of:- (a) the Option Price; or (b) the price paid or to be paid by the proposed transferee(s) for each share, plus an amount equal to a proportion of any other consideration which, having regard to the substance of the transaction as a whole, can reasonably be regarded as an addition to the price of the shares. If any part of the share price is payable other than in cash, the Optionholder shall be entitled to elect to take such part of the price in cash. In the event of disagreement as to the price, its calculation shall be referred to an independent person acting as an expert and not as arbiter nominated by the Optionholder and the Company, or, in the absence of such agreement, a Handbook of Venture Capital Documentation Page 208 person nominated by the Codent for the time being of the Institute of Chartered Accountants of Scotland whose decision shall be final and binding; and 7.3.2 where there is to be a Listing an opportunity shall have been offered to the Optionholder to dispose of the Option Shares on terms no less favourable than those extended to other shareholders in connection with that Listing. 7.4 7.4.1 Where a further issue of shares by the Company is proposed after the date of this Agreement the Company and the Shareholders will procure that:- (a) the Optionholder is given 10 business days notice, by the Company, of such proposed issue; and (b) the Optionholder is given the opportunity to subscribe for shares in accordance with the terms of Clause 7.4.2. 7.4.2 Upon each notice to the Optionholder pursuant to Clause 7.4.1 the Company and the Shareholders shall sign all documents and otherwise take all steps reasonably required by the Optionholder to provide the Optionholder with a right to subscribe at a price to be agreed between the Company and the Optionholder (being not less than the price at which such further shares shall be issued) for that number of shares in the share capital of the Company which when aggregated with the Option Shares, represents 4% of the issued share capital of the Company as enlarged by the relevant proposed share issue. 7.4.3 In the event of failure to agree the price at which the Optionholder will subscribe for such shares within 10 business days of notification by the Optionholder that it wishes to subscribe for shares the matter shall be referred to an independent person acting as an expert and not an arbiter nominated by the Optionholder and the Company and in the event of failure to agree within 5 business days, on the application of either party to the Codent for the time being of the Institute of Chartered Accountants of Scotland, who will determine the fair value at which the bank should subscribe for shares but which, in any event, would not be less than the price at which any further shares are/have been issued. The decision of such expert shall be final and binding and the cost shall be borne as he directs. 8 WARRANTIES The Company warrants to the Optionholder that:- 8.1 the information provided by the Company to the Optionholder in terms of Clause 6.2 is, accurate and materially complete at the time that it is given; 8.2 the directors of the Company have been authorised by the Company in general meeting to grant the Option and to allot and issue the Option Shares on its exercise all in terms of Section 80 of the Act, and under the terms of that authorisation, the Directors may allot and issue the Option Shares notwithstanding that exercise of the Option by the Optionholder may occur after expiry of the Directors' authority to issue those Option Shares; 8.3 the Articles of Association have been amended so as to enable:- Handbook of Venture Capital Documentation Page 209 8.3.1 the creation of sufficient A Ordinary Shares in respect of the Option; and 8.3.2 the transfer of Option Shares in terms of Clause 10 below; 8.4 the Shareholders are all of the shareholders of the Company. 9 NEW SHAREHOLDERS 9.1 The Company undertakes to the Optionholder that it shall not register any transfer of legal title to any shares in the Company:- 9.1.1 where a Change of Control would result unless the provisions of this Agreement have been complied with; or 9.1.2 whether or not a Change of Control would result, unless the transferee(s) has entered into a Deed of Adherence to this Agreement in form and content satisfactory to the Optionholder. 9.2 The Company further undertakes to the Optionholder that no convertible shares, debentures, loan stocks, warrants or similar instruments shall be converted in accordance with their terms and that no shares in the share capital of the Company shall be issued to any person without first procuring that the holder or prospective allottee(s) has entered into a deed of adherence to this Agreement in form and content satisfactory to the Optionholder. 10 TRANSFER AND ASSIGNATION 10.1 Following exercise of the Option, the Optionholder shall be entitled to transfer or dispose of any part of the Option Shares to any other company in Bank Co plc group of companies (subject always to the terms of the Articles of Association). 10.2 The Shareholders agree and undertake that they shall exercise their rights as shareholders of the Company to vote in favour of any resolution to vary the Articles of Association on or after the date of exercise of the Option to include the right of the Optionholder to transfer shares within the Optionholder's group of companies. 10.3 the Optionholder may assign its rights under this Agreement (including its rights of assignation or nomination) at any time to any company which is from time to time a holding company or subsidiary of it or a subsidiary of its holding company and may nominate any of those companies to be holder of the Option Shares provided that if such company ceases to be a group company it shall immediately reassign its rights under this Agreement and as the case may be transfer the Option Shares to another group company. 11 NOTICES 11.1 All notices or other communications to or between the parties will be in writing and will be by first-class pre-paid post or by fax transmission, authenticated to the satisfaction of the Optionholder. 11.2 If by letter, receipt will be deemed forty-eight hours after posting (unless hand- delivered and then at the time of delivery) and if by fax will be deemed when sent, (provided a transmission report is received); where that date is a non-business day Handbook of Venture Capital Documentation Page 210 or after 5 p.m. on a business day, the deemed date shall be 9am on the next business day. 11.3 Any notice by the Company to the Optionholder shall be addressed to:- Bank Co (+ person name + place) 11.4 Any notice by the Optionholder to the Company shall be addressed to:- New Co Limited (+ place) 11.5 the Optionholder may rely upon any communication by telephone or fax purporting to be on behalf of the Company by anyone notified to the Optionholder as being authorised without enquiry by the Optionholder as to authority or identity. The Company agrees to indemnify the Optionholder against any liability incurred or sustained by the Optionholder as a result. 11.6 In order to prove that a notice or demand has been made, the Optionholder need only establish that the notice or demand was properly addressed and posted or transmitted. 11.7 Any notice given by the Optionholder to the Company shall be deemed to be an effective notice upon each and every party to this Agreement and the Company undertakes to procure that, where necessary, each party is informed of that notice. 12 DISPOSAL OF OPTION SHARES It is agreed between the parties to this Agreement that in the event of a sale or Listing of any part of the share capital of the Company, the Optionholder shall not be required to:- 12.1 make or give in connection with such sale or Listing any representation, warranty, undertaking or indemnity of any kind (other than a warranty as to its title to any shares to be sold by it in connection with such sale or Listing); or 12.2 make any contribution to the costs (including legal and accountancy fees and disbursements) incurred by any other party in connection with such sale or Listing. 13 DURATION AND LAW 13.1 The Option shall not prescribe provided that nothing in this Clause 13.1 shall operate to the prejudice of any provision of this Agreement contemplating the lapse of the Option. 13.2 This Agreement shall be governed by and construed according to the law of Scotland and the parties to it submit to the non-exclusive jurisdiction of the Scottish courts: IN WITNESS WHEREOF this Option Agreement made up of this and the 10 preceding pages and the Schedules are executed as follows:- Handbook of Venture Capital Documentation Page 211 SUBSCRIBED for and on behalf of NEW CO LIMITED By ..........................Direct or ..........................Direct or/Secretary at on.............................. ............2000 SUBSCRIBED for and on behalf of ..........................Authorised BANK CO by Signatory at on.............................. .......... in the presence of Witness ……………………………… Full name ……………………………. Address ……………………………… ……………………………………….. ……………………………………….. Subscribed by (Name) of New Co at on the day of …………………………………………. 2000 before the following (name) witness:- Witness ……………………………… Full name ……………………………. Address ……………………………… ……………………………………….. ……………………………………….. Handbook of Venture Capital Documentation Page 212 SUBSCRIBED for and behalf of ………………………………………….. Syndicator Co by an authorised Authorised Signatory signatory at on the of 2000 before this witness:- Witness ……………………………… Full name ……………………………. Address ……………………………… ……………………………………….. ……………………………………….. Subscribed for and on behalf of …………………………………… Investor Co by [one of its [Director/Authorised Signatory] directors] [an authorised signatory] at on the day of 2000 before this witness:- at on the day of 2000 before the following witness:- Witness ……………………………… Full name ……………………………. Address ……………………………… ……………………………………….. ……………………………………….. Repeated for number of signatories This is the Schedule referred to in the preceding Option Agreement entered into between New Co Limited and Bank Co plc and the Shareholders dated 2000 SCHEDULE Handbook of Venture Capital Documentation Page 213 DOCUMENT NUMBER 26 DOCUMENT TITLE CONDITIONAL OPTION AGREEMENT PURPOSE OF To exercise an option with the terms of an overall Option Agreement DOCUMENT SCHEDULE Part 2 Conditional Option Notice To: The Secretary, New Co Limited (the "Company") CONDITIONAL OPTION NOTICE Option Agreement: The Option Agreement between (amongst others), us and the Company dated . Unless otherwise specified words and phrases in this notice bear the same meaning that is given to them in the Option Agreement. Acknowledgement: We acknowledge receipt of your notice to us of a prospective [Listing] [Change of Control]. Notice: We now give notice of our conditional election to exercise the Option to subscribe for  A ordinary shares in the Company. Should this Notice represent only a partial exercise of the Option to subscribe then the Option Agreement shall continue in full force and effect in relation to the balance of Option Shares. Price: £50,000. Payment: Please open an account within the U.K. for receipt by telegraphic transfer of the Option Price, alternatively you may elect to receive payment by either cheque or bankers draft. Handbook of Venture Capital Documentation Page 214 If we do not hear from you within seven days of this Notice, payment will be made by bankers draft. Completion: This subscription will be made according to the provisions of the Option Agreement and the date of settlement shall be the date [of Listing] [on which Change of Control occurs]. If the [Listing] [Change of Control] does not occur within 60 days after the date of this notice then this notice shall be deemed to have been withdrawn by us. Signed ....................................... ........................... for  Date: ....................................... .................... SCHEDULE Part 3 – Option Notice To: The Secretary, New Co Limited (the "Company") OPTION NOTICE Option Agreement: The Option Agreement between (amongst others) us and the Company dated . Unless otherwise specified words and phrases in this notice bear the same meaning that is given to them in the Option Agreement. Notice: We now give notice of our election to exercise the Option to subscribe for  A ordinary shares in the Company. Price: £50,000. Handbook of Venture Capital Documentation Page 215 Payment: Please indicate an account within the U.K. for receipt by telegraphic transfer of the price, alternatively you may elect to receive payment by either cheque or bankers draft. If we do not hear from you within seven days of this notice, payment will be made by bankers draft. Completion: This subscription will be made according to the provisions of the Option Agreement and the date of settlement shall be on . We await allocation and receipt of our share certificate and authorise that you enter our name in your register of members. Signed ....................................... ........................... for  Date: ........................................................... Handbook of Venture Capital Documentation Page 216 DOCUMENT NUMBER 29 DOCUMENT TITLE SHAREHOLDERS UNDERTAKING PURPOSE OF An agreement between the shareholders of New Co to exercise their powers to meet agreed objectives DOCUMENT EXAMPLE OF USE This is a simple example which refers to objectives laid out in the Investment Agreement (document 21). KEY SENSITIVITIES The shareholders Undertaking will often spell out areas of protection for investors (prospective and retrospective), for management (majority and any minority) and common concerns (restrictive covenants, exit criteria and conditions under which shares may be transferred). AGREEMENT among (1) [ ] residing at [ ], and [ ], residing at [ ], (hereinafter collectively referred to as “the Shareholders”) of the first part; and (2) INVESTOR CO, a company limited by guarantee, incorporated in Scotland under the Companies Acts with registered number [ ], having its registered office at ………… a place …………. (hereinafter referred to as “Investor Co ”) of the second part. WHEREAS (A) Investor Co has agreed to [advance a loan of [ ] ( EUR [ ]) STERLING to [insert company name] (Company Number [ ]) having its registered office at [ ] (hereinafter referred to as “the Company”) and to subscribe for [ ]Shares in the capital of the Company; (B) The subscription and loan is to be documented in terms of [an offer letter issued by Investor Co and accepted by the Company and the directors of the Company on the date hereof] (hereinafter referred to as [“the Investment Agreement”]); and (C) It is a condition precedent of Investor Co advancing the loan to and subscribing for shares in the Company that the Shareholders agree to procure that the Company will comply with the terms of [the Investment Agreement]. Handbook of Venture Capital Documentation Page 217 NOW THEREFORE IT IS HEREBY AGREED as follows:- 1. UNDERTAKING The Shareholders do hereby undertake to Investor Co that they will exercise all votes (whether as shareholders in the Company and/or as directors of the Company) and all other powers available to them whatsoever to procure that the Company will comply with the terms of [the Investment Agreement] and the articles of association of the Company from time to time and that they will procure that all transferees of some or all of the shares held by any of the Shareholders in the capital of the Company will execute agreements in these terms forthwith upon becoming shareholders in the Company. 2. LAW This agreement shall be governed by the law of Scotland and the parties hereto prorogate the non-exclusive jurisdiction of the Scottish courts: IN WITNESS WHEREOF AGREEMENT among [ ] and INVESTOR CO __________________________________________ Re: [ ] Solicitor Co name and address AGREEMENT among [ ] Handbook of Venture Capital Documentation Page 218 and INVESTOR CO ___________________________________ Solicitor Co Handbook of Venture Capital Documentation Page 219 DOCUMENT NUMBER 30 DOCUMENT TITLE PERSONAL GUARANTEE PURPOSE OF To underwrite potential debt or default thereby exercising pressure not to default by the Guarantor DOCUMENT upon the Principal EXAMPLE OF USE This is a general personal guarantee relating to a large size deal KEY SENSITIVITIES Many VCs will not take Personal Guarantees from members of the management team, since they can result in undue pressure or irrational decision- making, in the event of a crisis. Under this Guarantee YOU MAY HAVE TO PAY INSTEAD of the principal debtor. You should consult your solicitor or other independent legal adviser before entering into this Guarantee. Unless otherwise specified in Clause 2 below, your liability under this Guarantee is for an unlimited amount. Your liability as regards further borrowing by the principal debtor may be terminated in the manner set out in Clause 4 below. PERSONAL GUARANTEE To: INVESTOR CO, a Company incorporated under the Companies Acts in Scotland (Company Number: xxxxxxxx) and having its Registered Office at (place) (“the Company”) 1. I, (name), residing at (place) (“the Guarantor”) hereby unconditionally guarantee payment or discharge and undertake on written demand made by the Company from time to time to pay or discharge to the Company all money and liabilities which are or which may become due, owing or incurred by the Principal to the Company in any manner whatever, whether actually or contingently, whether solely or jointly with any other person and whether as principal or surety, including all interest, discount, commission, fees and other lawful charges or expenses (whether before or after demand) which the Company may in the course of its business charge in respect of any of the above matters. 2. The total amount recoverable under this Guarantee shall be EUR 1,000,000. 3. I shall also reimburse to the Company (on a full indemnity basis) all costs and expenses incurred by the Company in connection with the recovery of any money due to the Company under this Guarantee. Handbook of Venture Capital Documentation Page 220 4. This Guarantee shall be a continuing security, notwithstanding any intermediate payment to the Company, or any settlement of account, or my death or mental incapacity, or any other matter whatever, but my liability may be determined and such liability crystallised at the expiration of one month after receipt by the Company of written notice signed by me to determine it. I shall remain liable after such determination to the extent of all such money and liabilities due, owing or incurred by the Principal to the Company as at the close of business on the date on which such notice expires, including liabilities arising pursuant to commitments entered into prior to the expiry of such notice, unascertained or contingent liabilities and interest, discount, commission, fees, charges, costs and expenses referred to above. 5. Until payment of the ultimate balance to the Company from the Principal, I shall remain liable to the full extent of this Guarantee and shall not be entitled to participate in any security held or money received by the Company on account of such balance, or to stand in the Company's place in respect of any such security or money, or take any step to enforce any right or pursue any claim against the Principal or any co-surety, or prove in competition with the Company in the bankruptcy or winding up of the Principal or such co-surety, and the Company may in the meantime hold any money received under or by virtue of this Guarantee on suspense account. 6. The Company may prove in the Principal's winding-up for the full amount of the Company's claim and retain the whole of the dividends to the exclusion of my rights as Guarantor in competition with the Company until its claim is satisfied in full. In the event of the Principal's winding-up, my liability will extend to all money which would otherwise have been due from the Principal if such event had not occurred or had not commenced until the Company received actual notice of it. 7. This Guarantee shall be in addition to, and shall not prejudice or be prejudiced by, any other security or guarantee at any time held from or on account of the Principal. This Guarantee may be enforced without the Company's first taking any steps or proceedings against the Principal or having recourse to any such security or guarantee. Handbook of Venture Capital Documentation Page 221 8. The Company may, at all times, in its absolute discretion, and without affecting my liability, (i) grant, continue, vary, renew, refuse, determine or increase any credit or facilities to the Principal, (ii) grant any indulgence to, release, compound with or enter into any other arrangement whatever with the Principal, me or any other person, (iii) deal with, renew, vary, release abstain from perfecting or enforcing, enforce or realise any security, guarantee or other rights held by the Company from or on account of the Principal, or (iv) do or omit or neglect to do anything whatever which (but for this provision) might operate to discharge or reduce my liability. 9. Any settlement or discharge between the Company and me shall be subject to the condition that no security or payment to the Company by the Principal, me or any other person shall be avoided or reduced pursuant to any provision or enactment relating to insolvency or otherwise. If any such security or payment shall be so avoided or reduced, the Company shall nevertheless be entitled to exercise all rights which, by virtue or as a consequence of this Guarantee, or any security held for my liability, it would have been entitled to exercise but for such settlement or discharge. Where any security is held by the Company for my liability, the Company will be entitled to retain such security for such period as the Company shall determine after repayment in full of all money hereby guaranteed, notwithstanding any release, settlement or discharge made or given by the Company. 10. A demand for payment or any other demand or notice by the Company under this Guarantee may be made or given by any director or the company secretary of the Company by letter addressed to me and sent by post to or left at my existing or last known place of business or abode (or, if more than one, any one of such places). If sent by post, it shall be deemed to have been made or given at noon on the day following the day the letter was posted (even if it is returned by the Post Office). 11. As a separate and independent stipulation, all sums of money which may not be recoverable from me on the footing of a guarantee, whether by reason of any legal limitation or the insolvency of the Principal or any other fact or circumstances (whether known to the Company or not), shall nevertheless be recoverable from me as sole or principal debtor. Handbook of Venture Capital Documentation Page 222 12. All payments falling to be made by me shall be made to the Company without any set-off or counterclaim and free from any deduction or withholding for or on account of any taxes. 13. A certificate by any director or the company secretary of the Company as to the money and liabilities for the time being due or incurred by the Principal to the Company shall, in the absence of manifest error, be conclusive and binding on me. 14. Until the ultimate balance owing to the Company by the Principal has been satisfied in full, the Company shall have a lien on all my property in the Company‟s possession, whether for safe custody or otherwise. 15. For the purposes of this Guarantee: (a) "the Company" includes it successors and assigns; (b) "this Guarantee" includes any separate or independent stipulation or agreement contained in this document; (c) "person" includes a company, society, corporate, firm or an individual, and any executor, administrator, committee, receiver or other person lawfully acting on behalf of any such person; (d) "Principal" means New Co, a Company incorporated under the Companies Acts in Scotland (Company Number: xxxxxxxx) and having its Registered Office at (place), and shall include its successors and assigns; References to "I" or "me" means the party named in clause 1 as the Guarantor (including the Guarantor‟s successors and assigns). Where any such party is also named as Principal, such party shall be liable as guarantor only for the money and liabilities due or incurred to the Company by the other party or parties comprising the Principal. References to the singular include references to the plural and vice versa. 16. This Guarantee shall be governed by and construed in accordance with Scots law. Handbook of Venture Capital Documentation Page 223 17. It is agreed, for the Company's exclusive benefit, that the Scottish Courts shall have jurisdiction to settle any dispute or difference which may arise out of or in connection with this Guarantee or the legal relationships established by this Guarantee. Nothing in this Clause shall limit the Company‟s right to take proceedings in any other court of competent jurisdiction. 18. I consent to the registration of this Guarantee and to the registration of any certificate issued on behalf of the Company pursuant to Clause 13, for preservation and execution. IN WITNESS WHEREOF these presents consisting of this and the three preceding pages have been executed as follows: SUBSCRIBED by the above named (name) Signature……………………………. in the presence of: ……………………………Witness ……………………………Name …………………………….Occupation …………………………….Address ……………………………. Date: September 2000 Signed by Investor Co for identification purposes only by: …………………………………… _______________________________ PERSONAL GUARANTEE _______________________________ by Handbook of Venture Capital Documentation Page 224 (Name) in favour of INVESTOR CO Solicitor Co (name and place) Handbook of Venture Capital Documentation Page 225 DOCUMENT NUMBER 31 DOCUMENT TITLE SHARE CAPITAL CERTIFICATE PURPOSE OF To officially distribute share ownership DOCUMENT [Company‟s Solicitor‟s Letterhead] Investor Co Address Dear Sirs [ ] Limited (“the Company”) We refer to your proposed [loan of EUR[ ] to] [and] [subscription of EUR[ ] for [ ] shares in] the Company. We hereby confirm that we are solicitors to the Company and certify that:- 1. the authorised share capital of the Company is EUR[ ] divided into [ ] Preference Shares of EUR[ ] each, [ ] A Ordinary Shares of EUR[ ] each and [ ] Ordinary Shares of EUR[ ] each; 2. all the directors and all the shareholders of the Company are listed, and the Company Secretary is named, in the Schedule below; 3. subscription moneys totalling EUR[ ] have been received by the Company from the persons named in the Schedule below in respect of the shares shown as held by them [and have been credited to the Company‟s bank account with [ ]; 4. all of the issued shares are fully paid; 5. prior to giving this certificate the Company has amended its memorandum and articles of association in accordance with the resolutions, a copy of which has been supplied to Investor Co as part of its completion requirements; 6. neither the Company [nor any of its subsidiaries have] passed any elective resolution (within the meaning of section 379A of the Companies Act 1985); Handbook of Venture Capital Documentation Page 226 7. the Company has no subsidiaries [other than those listed in the Schedule which, unless otherwise stated, are wholly owned]; 8. on [ ] the Company acquired [the whole of the issued share capital of [ ] Limited which became and remain a wholly owned subsidiary of the Company] [[all] of the assets of the partnership trading as [ ]] for a consideration of EUR[ ]. Dated this day of 199 …………………………………….. SCHEDULE Directors Shareholding [ [ ] ] Company Secretary: [ ] [Subsidiaries: [ ]] Handbook of Venture Capital Documentation Page 227 DOCUMENT NUMBER 32 DOCUMENT TITLE DISCLOSURE LETTER PURPOSE OF Towards completion of an investment investors will seek warranties – the comfort of knowing that if DOCUMENT disclosed information is untrue, they have a basis upon which to sue. An indemnity is a covenant giving protection against a possible future contingent liability. EXAMPLE OF USE Here the warranties and indemnities are listed, referencing a shareholders agreement or undertaking. KEY SENSITIVITIES It is crucial for the investor to have disclosed the true state of past and future liabilities. Management, however may seek to minimise their exposure by limiting warranties and indemnities. Our Reference: xxxxxxxxxxxxxxxxxx Your Reference: xxxxxxxxxxxxxxxxxxx Strictly Private & Confidential Solicitor Co (place) (date) Dear Sirs New Co Limited 1999 Investment We refer to the Share Subscription and Loan Agreement among the Company, the Director and the Investors to be executed by the Company of even date herewith ("the Agreement"). This is the disclosure letter referred to in Clause 16 of the Agreement which qualifies the warranties set out in Clause 16 of the Agreement ("the Warranties"). All Warranties are given by the Director subject to the events, occurrences, matters, facts, disputes, assets, liabilities, obligations or rights apparent from this disclosure letter and in the documentation attached to this disclosure letter ("the Disclosure Documents") and the Director's liability in respect of any breach of or claim in respect of the Warranties shall be excluded or limited where the matter giving rise to such liability is disclosed in this disclosure letter. Handbook of Venture Capital Documentation Page 228 All words and expressions defined in the Agreement shall, save where the context in this disclosure letter clearly otherwise requires, have the same respective meanings in this disclosure letter and the provisions governing the interpretation of the Agreement shall be deemed to have been incorporated into this disclosure letter. All disclosures in this disclosure letter are made by the Director in respect of each of the Warranties generally and shall not be limited or restricted in any way by references in them which have been included, for the sake of convenience only, to particular Warranties. General Disclosures This disclosure letter shall be deemed to include and the Investors agree that there are hereby incorporated into this disclosure letter by reference as having been disclosed the following events, occurrences, matters, facts, disputes, assets, liabilities, obligations or rights:- 1. those apparent from the face of the Business Plan and/or the Accounts and/or the Management Accounts; 2. those apparent from the face of the letter dated xxxxxxxx from New Co‟s Auditors to the Company; 3. those apparent from the face of the report of Consult Co dated xxxxxxxx; 4. those apparent from this disclosure letter and/or the Disclosure Documents; 5. those apparent from an examination of the microfiche obtained on xxxxxxxx of the file at the Companies Registration Office (place) in respect of the Company (save insofar as any such entries or information are inconsistent with that set out in the solicitors certificate addressed by us to the New Investors of even date herewith); and 6. those apparent from the Agreement and any acts or transactions contemplated or required by the Agreement. Handbook of Venture Capital Documentation Page 229 Specific Disclosures The following specific disclosures are fairly made and, for convenience only, reference is made to specific Warranties. Each event, occurrence, matter, fact, dispute, asset, liability, obligation or right disclosed shall, however, be deemed to have been fairly disclosed in respect of all the Warranties and shall not be limited to the Warranty which is referred to below:- Warranty Clause Disclosure Number 16.1 The Company has circulated to the Investors various different sets of profit and cash flow forecasts and underlying assumptions. The latest set of profit and cash flow forecasts dated 19 January 2000 (attached to this disclosure letter as Disclosure Document 1) contains the latest profit and cash flow forecasts prepared by the Company. The Investors should disregard any profit and cash flow forecasts circulated to the Investors before the profit and cash flow dated 19 January 2000. The Business Plan is supplemented and amended by the following documents:- The technical milestones set out in the document entitled "New Co Project Plan" dated xxxxxxx (a copy of which is attached to this disclosure letter at Disclosure Document 2) are the latest technical milestones set by the board of directors of the Company for the Company; and The sales and marketing strategy set out in the document entitled "New Co Sales & Marketing Strategy" (a copy of which is attached to this disclosure letter at Disclosure Document 3) amends the sales and marketing strategy set out in the Business Plan. 16.5 The Company has been adversely affected by losses since the date of the Management Accounts. The Company made losses totalling approximately £30,000 between the date of the Management Accounts and 2 February 2000. The Company has not made significant losses between 2 February 2000 and the date of this letter. 16.10 The Company is the sole owner of all of the Intellectual Property owned by the Company. The Company is not the sole owner or sole licensee of all of the Intellectual Property used by the Company for the carrying on of its business. In common with most other companies, the Company has obtained non-exclusive licences of certain "shrink-wrapped" software packages (referred to in this disclosure letter as "the Software"). The Company does not own any of the Intellectual Property subsisting in respect of the Software but the Company is instead licensed on a non-exclusive basis to use the Software for the carrying on of its business. The Intellectual Property owned by the Company is now (or may in the future) be Handbook of Venture Capital Documentation Page 230 Warranty Clause Disclosure Number the subject of the following liens, charges and encumbrances:- a bond and floating charge granted in favour of the Bank Co dated xxxxxx and delivered to the Registrar of Companies for registration on xxxxxxxxxx; a bond and floating charge to be granted in favour of Bank Co plc; a bond and floating charge to be granted in favour of syndicator; a bond and floating charge to be granted in favour of syndicator; a bond and floating charge to be granted in favour of syndicator; a bond and floating charge to be granted in favour of syndicator ; a bond and floating charge to be granted in favour of Investor Co; a bond and floating charge to be granted in favour of syndicator I; a bond and floating charge to be granted in favour of syndicator; and any liens, charges and/or encumbrances arising automatically by operation of law (including, without limitation, a landlords' hypothec). 16.13 The Company has filed the following UK patent applications:- UK patent application number xxxxxxx. This application was filed on xxxxxx; and UK patent application number xxxxxxxx. This application was filed on xxxxxx. The Company has filed a UK registered trade mark application in respect of the mark "XXXXXXXXXX". This application was filed on (date). 16.16 The Company does not have access to the source code of the Software and is unaware of any escrow arrangements existing in respect of the Software. Discussions are currently ongoing in respect of contributions to be made by the 16.19 Company to personal pensions plans held or to be held by Pension Co. No such contributions have yet been made by the Company 16.22 The Director is a director of AN Other Co. This disclosure letter is given by us as agents for and on behalf of and as instructed by the Director. All information included in this disclosure letter has been provided for and on behalf of the Director and accordingly no responsibility for any of its contents is accepted by this firm. Please confirm your acceptance of this disclosure letter on behalf of Investor Co and Syndicator Co (n) by signing and returning the duplicate of this disclosure letter. Yours faithfully We, Solicitor Co, acknowledge receipt and confirm our acceptance of the foregoing disclosure letter on behalf of and as instructed by (names). Handbook of Venture Capital Documentation Page 231 …………………………. Solicitors ………..………… Date Handbook of Venture Capital Documentation Page 232 DOCUMENT NUMBER 33 DOCUMENT TITLE INVESTMENT RECORD PURPOSE OF To record a complete set of the investor‟s interests DOCUMENT EXAMPLE OF USE Not only is this a record, it is also a useful checklist INVESTMENT RECORD Company Name and Address Business Activity Telephone: Fax: Prime Contact: Total Equity Accounts - Issued Contact: Directors & their equity Shares % - Authorised interests: Held - Options Voting Rights by Class Investor Co - Ordinary Investment: Equity - Preference shares Share Type 1 - Other No of shares Price: Registered Securities (charges) % Total: Income: Due: Key-man Insurance Ye No s Amount: Share Type 2 Other Income - Ongoing No. of Shares: Price: Directors‟ fees: % Total: Due: Income: Monitoring fee: Due: Due: Redemption: Option: Other Income - on completion Loan Negotiation fees: Original Sum: Date invoiced: Interest Rate: Date paid: Payment Amount: Due: Legal fees cost: 1st Payment: Legal fees charged: No. of Date Invoiced Payments: Date Received: Lease Original Sum: Management Accounts Handbook of Venture Capital Documentation Page 233 Interest Rate: Date Due: Payment Amount: Due: Year End 1st Payment: No. of Payments: Auditors Other Syndicate Investors and % Interests Clearing Bankers: Other Financing Amount: Provider : - Overdraft Lawyers: - Loans - Guarantees - Leasing - Other Date Completed: Handbook of Venture Capital Documentation Page 234 DOCUMENT NUMBER 34 DOCUMENT TITLE APPOINTMENT LETTER PURPOSE OF Appointing a nominee to the Board of an investee company and stipulating what is expect of him/her. DOCUMENT KEY SENSITIVITIES NOTE: the appointed Director is not a representative of the investor on the Board, rather their responsibilities are those of a Director to company law, the public, the Board, the company shareholders and its creditors. Reference: Date: Dear [……………………… Limited] Appointment as Non-Executive [Chairman/Director] of Investor Co Limited We have agreed with …………(company name)………… Limited [add Company name] that Investor Co [and other Investors] have the right to appoint a Non-Executive [Chairman/Director] to the board. Following our discussions, although the Company will write to you separately to offer you the post formally, we are writing to you now to outline the role that Investor Co [and other VCs (the Investors)] envisage for you, should you choose to accept. 1. Your position will be that of Non-Executive [Chairman/Director]. As you will be aware, legally there is no distinction between the duties of directors, and you will therefore owe all the normal duties that a director owes to a company. It is expected that you will [chair/attend] all board meetings and take whatever steps may be necessary to ensure that you have sufficient knowledge and familiarity with the Company‟s affairs to discharge the duties which your position entails. The time involvement on your part will, to a large extent, be determined by events within the Company. As a minimum, however, it is expected that the board will meet officially once a month and that you will meet unofficially with senior management and [Investor Co] as necessary. 2. Although you are nominated by Investor Co [the Investors/and other VCs], your obligations and responsibilities will be to the Company. Accordingly, like other directors, you should act at all times in what you consider to be in the best interests of the Company. You should exercise independent judgement on all matters and, while Investor Co [and the Investors] expect you to have Handbook of Venture Capital Documentation Page 235 regard to [its/their] interests, [it/they] recognise[s] your primary obligations are to the Company, and will not seek to instruct you, nor are you under any obligation to, act in accordance with [Investor Co] wishes. 3. The primary functions envisaged are to:- (a) Catalyse the strategic thinking in the Company, widen the horizons within which the board determines strategy and ensure that the Company prepares, and implements, an annual strategic and operating plan with appropriate objectives; (b) Procure that resources, especially from an operational point of view, are available to the Company and that they are consistent with its objectives. In particular, this may involve liasing with the Company‟s bank to ensure appropriate facilities are made available to the Company; (c) Ensure that the appropriate financial reporting disciplines are in place and are working adequately. This should include the Company monitoring its cashflow and bank balance on a weekly basis; (d) Monitor management performance, including the extent to which management are achieving the objectives planned, particularly with regard to product/business development, the growth of the Company infrastructure and the development of sales channels; (e) [Set up and] Chair the Company‟s Remuneration Committee which will [: (i)] agree remuneration levels for the Company‟s employees and directors; [and (ii) [run/set up] the share plan] (both subject to Investor approval, where necessary); (f) Initiate and assist with the recruitment of senior employees and directors as the Company develops; (g) Ensure that the board has adequate systems to safeguard the interest of the Company where these may conflict with the personal interests of individual directors; and (h) Act as an objective sounding board for the directors and [Investor Co]. Handbook of Venture Capital Documentation Page 236 4. We will expect you to liase regularly with us and as a minimum after each board meeting. We would like you to keep us informed of the progress and strategy of the Company. In particular, we would like to receive from you a brief [monthly/quarterly] written report on the Company‟s progress, highlighting any issues you feel are particularly important to the Company‟s future strategy and success. In addition, we recommend that the Company give a presentation to [Investor Co] on a [six] monthly basis, which we would expect you to attend. 5. While your appointment as Investor Co [the Investors‟] nominee may be withdrawn at any time without compensation from Investor Co [the Investors] or the Company, the intended duration is one year from appointment. At that date, Investor Co [the Investors] will review the position with yourself and the Company and will inform you whether [it/they] wish[es] you to accept re-nomination for a further period. For as long as you remain Investor Co [the Investors] nominee you will be subject to retirement by rotation. 6. [As discussed,] Your remuneration [will be set by the Company and, at this stage, we understand it] [will be EUR ……k per annum plus reasonable expenses] [plus a daily rate for additional work over …. days per month] [plus [….%] participation in the share plan] [to be agreed with and paid by the Company]. [You may also wish to invest in the Company as part of the current fundraising. Please feel free to discuss this with us]. [Note: rates should be between EUR 6- EUR 12k pa}. Obviously, this list is not exhaustive and we would be happy to discuss any further issues you believe are relevant. By its nature, this letter has to be somewhat formal in tone. May I nevertheless take this opportunity to welcome you to the role and to wish you every success in the appointment. If I can be of help at any point please feel free to contact me. Kind regards. Yours sincerely, ….. Investment …. Investor Co Limited cc: ………………… Limited Handbook of Venture Capital Documentation Page 237 DOCUMENT NUMBER 35 DOCUMENT TITLE STANDING ORDER PURPOSE OF To formalise and log-in periodic payments from New Co to Investor Co by instituting an order to New DOCUMENT Co‟s bank agreed by New Co KEY SENSITIVITIES A bank‟s refusal to honour a Standing Order is a clear sign of difficulties at New Co. STANDING ORDER FORM To: Bank Co From: New Co Date: xxxxxxxxxxxxxxxx Please make the payments detailed below and debit my/our account Name of Account to be New Co Account Number: xxxxxxxxxx debited Reference to be quoted Interest Name of Payee Investor Co Account Number: XXXXXXXXXX Bank & Branch to which Bank Co payment is to be made Sort Code: xxxxxx Ten thousand one hundred EUR 10,125 Amount in words and twenty five EUR Date of payments 6 monthly: 31 January and 31 July Date of first payment 31 January 2002 Special instructions if any Until further notice Please cancel all previous standing orders to Investor Co with Signed Reference Interest …………………………………… Handbook of Venture Capital Documentation Page 238 Date ……………………………………. …………………………………… Handbook of Venture Capital Documentation Page 239 DOCUMENT NUMBER 36 DOCUMENT TITLE EXCEPTION REPORT (BLANK) PURPOSE OF To record and report to Investor Co‟s Board when an investment fails to meet a payment target DOCUMENT EXCEPTION REPORT Company Name and Address Payment Default Nature of Default [Dividends]/[Inte rest]/[Capital] Telephone: [Fees] Fax: Amount Defaulted Prime Contact: No. of Payments Accounts Original Default Date Contact: Directors & their equity Share % interests: s Held Profit & Loss date Actual Month ( ) YTD ( ) Investor Co Budget ( ) YTD ( ) Investment: Equity Share Type 1 Balance Sheet Net Worth: No of shares Price: Total Invested: % Total: Income: Security: Due: Estimated Amount Exposed: Share Type 2 No. of Shares: Comments: Price: % Total: Income: Due: Redemption: Option: Loan Original Sum: Interest Rate: Payment Amount: Due: 1st Payment: No. of Payments: Lease Original Sum: Interest Rate: Payment Amount: Due: 1st Payment: Handbook of Venture Capital Documentation Page 240 No. of Payments: Other Syndicate Investors and % Interests Other Financing Amount: Provider: - Overdraft - Loans - Guarantees - Leasing - Other Handbook of Venture Capital Documentation Page 241 DOCUMENT NUMBER 37 DOCUMENT TITLE EXCEPTION REPORT (EXAMPLE) EXAMPLE OF USE Some investors „write-off‟ their entire investment and then „write-back‟ if its value rises. Others maintain a valuation of the investment on their books, making provisions against expected lower valuations. Lower valuations will result from Exception Reports recording poorer than expected results or projections. In some circumstances, Investor Co‟s Board or Panel may decide upon strategic changes in relation to New Co on the basis of an Exception Report and associated information. EXCEPTION REPORT (date) Company Name and Address Payment Default New Co (place) Nature of Default [Dividends]/[Interest] /[Capital] Telephone: XXXXXXXXX [Fees] Fax: XXXXXXXXX Amount Defaulted No default Prime Contact: (name) No. of Payments Accounts (name) Original Default Contact: Date Directors & their equity SHAR % interests: ES HELD (Name) 1,005 0.4 Profit & Loss April 1% xxxx (Name) (Name) Actual Month £(25,33 YTD £(95,509) 0) Investor Co Budget YTD ( Investment: ) Equity £50,000 Share Type 1 Ordinary shares Balance Sheet Net Worth: £16,428 No of shares 16,286 Price: £3.07 Total Invested: £50,000 % Total: 6.68% Income: Security: None Due: Estimated Amount Exposed: £50,000 Other Syndicate Investors and % Interests (Name) 53,812 22.08% Comments: (Name) 25,464 10.45% It was thought prudent to make a provision mainly due to difficulties in raising additional funds to take the (Name) 67,455 27.67% company forward to the next stage of development. (Name) 18,857 7.73% Although progress has been made, this has been much (Name) 17,300 7.09% slower than originally anticipated. On the positive side, (Name) 10,000 4.1% the company has put in place various management and Handbook of Venture Capital Documentation Page 242 (Name) 11,000 4.51% operational changes and has drastically cut its monthly (Name) 22,635 9.28% cash burn. It is also in the£350,000+ from a consortium advanced stages of raising second round financing of of new investors on fairly stringent conditions (including draw down against certain parameters). Other Financing NONE It should also be noted that development costs, while Amount: Provider significant, have largely been written off : as incurred, - Overdraft leaving intangible assets of less than £20,000 - Loans in the Balance Sheet. Our decision on whether to - Other invest in this round of finance will impinge upon the level of any investment provision considered necessary. The auditors believe, particularly if we do not invest, that some provision will be appropriate although this need not necessarily be 100%. Handbook of Venture Capital Documentation Page 243 DOCUMENT NUMBER 38 DOCUMENT TITLE EXIT PROPOSAL PURPOSE OF For Investor Co to agree the terms upon which it will withdraw from New Co/realise the value of its DOCUMENT investment. EXAMPLE OF USE Here Investor Co is realising the value of its investment having decided that it maximum up-side has been reached. KEY SENSITIVITIES Note the „non-embarrassment‟ clause INVESTOR CO EXIT PROPOSAL New Co Ltd INVESTMENT EXECUTIVE: (Name) DATE SUMMARY OF MAIN REASONS FOR INVESTING: We do not fit into company‟s expansion plans Original remit fulfilled Opportunity to make a return and recycle funds KEY SENSITIVITIES Our expectations vs. management Basis of valuation Difficulties of valuing early stage company Conflict of interest between management and investors No external benchmark 8. NAME AND ADDRESS New Co 9. DIRECTORS Names 10. BANKERS Bank Co 11. AUDITORS Auditor Co 12. SOLICITORS Solicitor Co 13. NATURE OF BUSINESS: Details 14. ORIGINAL INVESTMENT – (date - 2 years before exit) Purpose £‟000 Source £‟000 Handbook of Venture Capital Documentation Page 244 Existing facilities 380 Management equity 20 Capital expenditure 1,380 Investor Co (1) 50 Working capital 40 Investor Co (2) 50 Costs 50 Bank Co (Loan 200 Guarantee) Bank Co (Loan) 1,200 Bank Co (Mezzanine) 330 Total £1,850 £1,850 ===== ===== 15. STRUCTURE and TERMS OF INVESTMENT 15.1. Because of the relatively small amount of management equity, the investment was structured to be mainly in Preference Shares 15.2. We invested £100,000 viz. 3,550 £1 „A‟ ordinary shares with a participating dividend of 5% of profits 96,450 £1 Preference shares with a net 9% dividend and redeemable from December 2000 - 2004 16. BACKGROUND AND HISTORY Detailed description of the history of the investment relationship, detailing the investment, risks, work with New Co and planned exit route. Details also of proposed exit route, its value, effect on New Co and return to Investor Co. 17. ISSUES and CONCERNS Details of any legal and financial issues arising for Investor Co, New Co and syndicators or other stakeholders in exiting. 18. PROSPECTS Effect of exit on New Co potential effect on New Co and Investor Co or non-exit. 19. FINANCIALS Forecast Actual Forecast Actual Forecast Actual March 98 March 98 March 99 March 99 March 00 Dec 99 £’000 £’000 £’000 £’000 £’000 £’000 Turnover 372 369 2,056 1,552 2,488 1,880 Operating profit 62 (36) 539 78 682 225 Handbook of Venture Capital Documentation Page 245 Profit before tax (30) (65) 307 29 441 132 === ==== ==== === ==== === The company is performing reasonably well although less than expectations. Management wish to buy us out for a sum of £300,000 which will take make our return in two years to 28%. I recommend we accept this offer but to protect us against any potential buyer „in the wings‟ any agreement must include a non-embarrassment clause which will match our return with the other stakeholders should there be a sale of the company with a 12 month period. 20. INVESTMENT DIRECTOR’S RECOMMENDATION Details and recommendation of exit route, timing and price. Handbook of Venture Capital Documentation Page 246 DOCUMENT NUMBER 39 DOCUMENT TITLE INDEPENDENT NON-EXECUTIVE DIRECTORS PURPOSE OF A general policy/training document outlining the role, responsibilities and qualification of non- DOCUMENT executive directors. The role of the independent director/chairman The role of the non-executive director GENERAL Non-executive directors can perform a useful role in any business, however large or small, provided the individuals appointed are suited to an qualified to undertake the work. Practically all publicly listed companies, and many larger unlisted companies, have several non-executive directors; and if they don/t already, it is likely that institutional and/or venture capital investors will insist upon such appointment(s). Despite the “non-executive” prefix (perhaps “independent” or “external” would sound more appropriate), outside directors often perform special tasks e.g. - sitting on a remuneration committee, liasing with the company‟s bankers and/or investors, helping to install accounting systems, assisting the executives to prepare a business plan or corporate strategy paper. In some smaller companies, they can be fairly heavily involved in a particular capacity - at which level they be described as having a “hands-on” role. In such a case, the individual is probably filling a “skills gap” on the board, which the company cannot afford, or does not currently need, to fill by the appointment of a qualified, full-time executive director. QUALITIES AND ATTRIBUTES REQUIRED Because he is not involved in the day-to-day running of the company, the non-executive director/chairman should be able to take a “helicopter view” of the business and should apply that faculty in helping to guide the company and its executive directors along the chosen path. It follows, therefore, that - as a minimum requirement - the individual must be: HONEST, INDEPENDENT, OBJECTIVE and COMMERCIALLY EXPERIENCED. Handbook of Venture Capital Documentation Page 247 If the person also has a SPECIFIC SKILL (e.g. in marketing or finance) that is presently lacking on the board, so much the better. It is a practical necessity that he or she CAN DEVOTE THE TIME REQUIRED, whether that be (say) two days per week , or two days per month. To be able to act in an honest, independent and objective fashion - and not to be frightened or reluctant to state a view which may be truthful but uncomfortable so far as the rest of the board is concerned - the individual must NOT BE DEPENDENT ON THE JOB FOR HIS INCOME. It is also better, if the non-executive is appointed by an outside investor, that he/she is NOT DEPENDENT ON THE APPOINTER‟S PATRONAGE. DUTIES OF THE NON-EXECUTIVE DIRECTOR / CHAIRMAN The non-executive director is not regarded, in law, as any different from a full-time director of a company, so far as his or her legal responsibilities are concerned. There is no such thing as an official list of duties for a non- executive director/chairman (though, who knows, the EC may get round to that yet), but the following list of tasks - based on experience - would probably be widely supported: Guidance To provide guidance and support to the chief executive. His is a lonely job and he should be able to regard the non-executive director/chairman as his friend, confidant and counsellor. Direction To ensure the company is run by a balanced and properly motivated management team; whose principal members participate at board level and communicate effectively with each other (and with their respective staffs). Strategy To ensure the company has a business plan with clearly defined objectives and strategy; that all senior executives know what those are; and that the business is operated with a view to meeting the objectives and targets set out in the plan. Objectivity At all times to adopt an objective and balanced Handbook of Venture Capital Documentation Page 248 view of the business, its direction and the abilities of its executive managers. Fairness To ensure even-handed treatment of all shareholders; and to take particular care to look after the interests of any external shareholders. Administratio To ensure matters such as remuneration, staff n appraisals and personnel development are properly handled and administered; and, where appropriate, to sit on or chair the Remuneration and Audit committees. External To assist in dealings with external shareholders, Relations bankers and professional advisers; and, when requested, with existing and potential new clients/customers. Order To ensure that the company holds regular board meetings, that are conducted in an orderly and professional manner; and that, in advance of each meeting, board members receive well prepared papers containing sufficient information to enable them to make decisions. Discipline To help instil a sense of discipline in the business; ensuring, at least, that all statutory requirements are met and that external investors and the company‟s bankers are kept regularly and fully informed of the company‟s progress. Contact To act as a contact for or introducer of external advisers, should the need arise. Assignments At the board‟s request, to take on any specific assignments that are particularly suited to the director‟s/chairman‟s personal skills. REMUNERATION OF NON-EXECUTIVE DIRECTORS Fees paid to non-executive directors for their services vary widely - from about £5,000 per annum up to £40,000 or more. There are no set guidelines; much depends on the time required and the degree of skill and level of responsibility exercised. A lot also depends on the depth of the paying company‟s pocket. Handbook of Venture Capital Documentation Page 249 But if the job is to be done properly and seriously, companies can expect to pay appropriate individuals anywhere between £500 and £1,000 (or more) per day devoted to the company‟s affairs (including preparation for meetings and behind-the-scenes work). As a general guide, most non-executive directors should be paid between £7,500 and £15,000 per annum; and reasonably active chairmen between £15,000 and £30,000. „Nodding donkies‟ - non-executives who turn up at board meetings just for the appearance money, who agree with everyone round the table and who never take a controversial stance on anything - are of no use whatever to any company. They are truly an avoidable overhead. But an effective non-executive, who makes a real contribution, is someone who probably comes cheap at the price. If you would like to discuss this subject in more detail, or would simply like more information about W L Ventures‟ activities and investment criteria Handbook of Venture Capital Documentation Page 250 DOCUMENT NUMBER 40 DOCUMENT TITLE PREPARING A BUSINESS PLAN PURPOSE OF A general training document which could also be used in response to enquiries on the processes of DOCUMENT creating a business plan. Some point to remember when preparing a business plan THE PLANNING STAGE The business plan should be a summary document – aimed at informing and captivating the reader – not a work to rival Tolstoy. The prose part should be no more than 10 to 20 pages long. The appendices – which are often best bound separately – might be 15 to 20 pages long : of which at least 9 pages will comprise financial projections. If the plan does not grab the reader‟s attention in the first 5 to 10 minutes, the chances are it has failed. For this reason alone, every plan should have a one-page executive summary. If management cannot summarise their hopes and ambitions on one or (at most) two pages, they have probably not thought the proposal through enough; or they may lack the ability to identify key points and to express themselves clearly and concisely. Either failing may warrant a subjective “no thanks”. Always attempt to write the plan from the investor‟s perspective. It takes longer to write a short plan than a mighty tome. Remember the words of Samuel Johnson : “What is written without effort is, in general, read without pleasure”. And on another occasion : “I am sorry, dear friend, to write you so long a letter. I did not have time to write a short one.” Handbook of Venture Capital Documentation Page 251 CONTENTS The following is intended merely as a guide and an aide-memoire. It does not need to be followed slavishly and obviously should be adapted to meet the needs of the particular case : Index – makes the document faster/easier to read and adds a professional touch. Management and Advisers – name and address of company, with telephone and fax numbers, list of directors and senior managers, noting their ages and duties, list of solicitors, auditors, tax advisers, corporate finance advisers and bankers : noting addresses, with contact names and phone/fax numbers. Executive Summary – crisp, punchy summary of what the business does, achievements to date, future objectives, how much cash is needed, in what form and for what purpose, key figures, summary of historic and projected sales, PBT and net worth, conclusions, why one should invest. Outline Investment Proposals – do the investor‟s job for him : summarise finance required and purpose, proposed equity and debt financing scheme, with summary terms, resultant share capital structure and equity percentages, key ratios and IRRs. Introduction – short history of the business, objectives and strategy, why/how much funds are required, type/mix of funds sought, equity percentage owners are willing to concede. Management – summary details of directors and key managers, specifying ages, duties, experience and shareholdings. If detailed CVs are offered, put them in the appendixes (and state their location in this part of the prose section). Business – what it does now and will do in the future, how trade is to be developed. Products/Services – detailed description(s), in what respects the proposers‟ goods/services are „better‟ than competitors‟. Market – current position, trends, market share and how/why it should grow, external influences, competitors and their characteristics, what marketing edge the proposers have. Handbook of Venture Capital Documentation Page 252 Financial – summarised historic trading results (2 to 3 years‟, if available), latest audited balance sheet, 3 years‟ trading, cash flow and balance sheet projections, list of assumptions, notes explaining significant items each year and what did/will help or hinder performance, key ratio analysis. Conclusions – balanced assessment of strengths and weaknesses (SWOT analysis), reward versus risk, why one should invest. Handbook of Venture Capital Documentation Page 253 APPENDICES Management – short-form CVs for all directors and key personnel listed in main plan under ”Management”. Give names and addresses of suitable referees. Financial – detailed trading, cash flow and balance sheet projections and assumptions on which they are based, ratio analysis, sensitivity calculations. Marketing Data – customer list, details of major contracts/orders if appropriate, suppliers‟ list (stating alternative sources of supply); list of competitors. Other Items – relevant press cuttings and anything else that genuinely adds to the interest/quality of the presentation. Handbook of Venture Capital Documentation Page 254 DOCUMENT NUMBER 41 DOCUMENT TITLE RAISING VENTURE CAPITAL PURPOSE OF A general training document which could also be used in response to enquiries on the processes of DOCUMENT creating a business plan. Some key points to consider when raising venture capital AWARENESS/PLANNING/PREPARATION Know where your company is going, what you want to achieve and how you are going to do it. In short, have a plan. Appoint the best and most experienced professional advisers (accountants, corporate lawyers, fund raisers) you can afford. Never use friends. Understand, by discussion with your accountant or other qualified adviser, what mix of funds you require (e.g. equity, preference shares, loan capital). Also establish the right mix of long and short term borrowings. Never use short term finance (e.g. bank overdraft) to fund long term assets (e.g. buildings or major items of plant); and, if you can, avoid debt factoring. To allow for interest rate fluctuations, avoid the temptation to borrow more than 4 x maintainable [future] profit before interest and tax (“MPBIT”). Note: Borrowing 4 x MPBIT = interest cover of 2.5 x at an interest rate of 10% p.a. and interest cover of just under 1.5 x at an interest rate of 17% p.a. Prepare a clear, concise and well written business plan, with a short executive summary at the front. It is quality that impresses, not quantity. Have your business plan professionally vetted and edited; but never let your accountant write the whole thing for you. It must bear your imprimatur. Allow plenty of time to raise the capital: never less than one month; preferably at least three months (it can take even longer). Handbook of Venture Capital Documentation Page 255 If you are likely to need the cash urgently, consider pre- arranging bank bridging finance when investors are committed - though bridging can be notoriously difficult to obtain. DECISIONS By all means shop around , but don‟t visit too many venture capitalists: some will be put off by the thought of an „auction‟. Decide what you want out of the arrangement (look on it as a financial marriage) and ask your professional adviser which sources of finance are most likely to fit the bill. Prepare a short list of target financiers (which might include „business angels‟) whose own requirements should be compatible with yours. Before you start the rounds, have a clear idea of how much equity you are prepared to concede, whether you will accept a non-executive director on your board (often a condition), and whether you are willing to commit yourself in principle to going public or selling out within say, a 3 to 7 year period, to allow the investor the exit he will probably require. THE PSYCHOLOGICAL APPROACH Try to understand the venture capitalist‟s approach by putting yourself in his shoes. Your professional adviser can help there; he should have sufficient experience to explain what are the venture capitalist‟s aims. You must do a professional selling job of yourself. The venture capitalist‟s main interest will be in you: investing in unquoted companies is a highly personal affair. Time, not money, is the venture capitalist‟s scarcest resource. He will make a very quick subjective judgement (probably in the first few minutes) whether he likes the cut of your jib. Successful investors rely a lot on their instinct. To make the meeting more worthwhile, send a copy of your business plan in advance. This gets you both off to a better start. Handbook of Venture Capital Documentation Page 256 THE MEETING AND PRESENTATION Be on time and, in a pleasant fashion, attempt to control the meeting. He is a professional interrogator and will respect this. Do not oversell yourself or the company. The venture capitalist sees a large number of propositions and is healthily sceptical by nature. Spell out your strengths - but also admit your weaknesses and explain how you are tackling them. This creates confidence. Questioning techniques vary; and some venture capitalists adopt an aggressive style deliberately. Be robust, but retain your sense of humour and do not lose your temper. Establish clearly what the venture capitalist wants: the level of equity percentage, any specific income or voting rights on his shares, a non-executive board seat, what sort of exit and within what timescale, any restrictions to be imposed on the company or on directors‟ remuneration, fees and costs, regular management accounting information. Equally important, find out what he can offer you: is he experienced, how fast can he act, can he provide further finance if it should be needed, can he offer other services, does he have useful contacts, what level of contribution can he make to you business. Decide whether his personality and approach suit you. Ask for references (existing investee companies of his) so you can carry out due diligence checks on him - just as he will on you. Ask what other information he wants and by what date. FOLLOW-UP TO MEETINGS Write and thank him for his time. This uncommon courtesy always goes down well. Supply further information requested as quickly and efficiently as possible. Handbook of Venture Capital Documentation Page 257 Allow a few days, then press for an early indication of interest in principle. Encourage him to carry out prompt due diligence checks. Warn him of any that are likely to be unfavourable and explain why this might be. If you do not like him, or find his requirements incompatible with yours, reject him quickly but politely. Handbook of Venture Capital Documentation Page 258 NEGOTIATING AND CLINCHING THE DEAL Be reasonable, but fight hard about the things that really matter (e.g. equity %, capitalisation of the business, dividend rights, remuneration and/or operational restrictions, board appointments): he will respect that. If a deal is struck, appoint an experienced corporate lawyer to act for you. Keep a close eye on progress and chase the deal along. Don‟t rest till his cash is in your bank. AFTERWARDS Make sure you both stick to your commitments. Get the most help you can out of him. Work hard to maintain good relations: you can‟t have too many friends. Remember you may need his help again in the future. Keep him and your bankers well and regularly informed. Always give plenty of warning if there are storm clouds ahead. Make sure his contribution to your business matches his promises at the outset - and, if not, seek your professional adviser‟s help and advice. THE THREE MOST IMPORTANT POINTS Appoint the best accounting and legal advisers you can find Produce a short, well-written business plan Remember to sell yourself and the team The readability of your plan and the impression you create in the first few minutes of the initial meeting are absolutely critical Handbook of Venture Capital Documentation Page 259 DOCUMENT NUMBER 42 DOCUMENT TITLE EQUITY INSTRUMENTS AND DEAL STRUCTURING PURPOSE OF A general training document which could also be used in response to enquiries on the processes of DOCUMENT creating a business plan. The precise financial instruments and financial structure of any venture capital investment is the result of aligning the interests and needs the company and its entrepreneurs with those of the investors. This document lays out some useful definitions and explains the advantages and disadvantages of particular financial instruments. EQUITY At one time this was used as a generic name for all kinds (classes) of share capital. Various accounting reporting requirements have seen this definition move towards ordinary shares only although this can also encompass 'A' or Preferred ordinary shares. The 'A' denotes one class of preferred ordinary shares; there can be others e.g. 'B' and 'C' all with different rights. 1. Ordinary Shares These are the basic ordinary shares exactly the same as those which management will have; they have no preferential rights to income or capital repayment and will usually attract one vote per share. 2. Preferred Ordinary Shares (sometimes 'A' ordinary) 'A' ordinary shares can have a wide variety of preferential rights. They can in fact be defined in any way we like but commonly they will be: a) redeemable; b) cumulative; c) convertible; d) participating; e) preferred or a combination of these. a) Redeemable means that the company can buy them back in certain circumstances. This would be used to give management a ratchet whereby their percentage shareholding can increase if they meet certain pre defined targets (normally profit related but sometimes based on sale value). Handbook of Venture Capital Documentation Page 260 b) Cumulative means that dividends build up and if not paid in early years (because of a lack of profits or reserves) will be carried forward until such time as these can be paid. c) Convertible normally means convertible into ordinary shares which we would normally want to do on a flotation of the company. d) Participating means being entitled to a participating dividend which is based on a percentage of profits before tax. This percentage can be set to vary from year to year (generally to escalate in later years). e) Preferred means as it says, having certain preferences. As well as those above, it also confers on a winding up of the company, a return of capital before the ordinary shares. f) Ordinary perpetuates the myth that these shares bear any resemblance to ordinary shares at all! It also confers the normal voting rights of one vote per share. Dividends can be either fixed e.g. x% of the subscription price - commonly 8 - 10%; participating as described above or a combination of these. They will normally rank after any preference dividend but before any ordinary dividend. 'A' ordinary shares will often also attract certain class rights, requiring consent from the 'A' ordinary shareholders before certain things can be done e.g. a) sell the company; b) change its accounting reference date; c) alter the share capital structure; e) change the Articles of Association; e) wind up the company. Quasi equity Normally this relates to Preference Shares. As with 'A' ordinary shares there can be more than one class of preference share. They also have a similar wide variety of preferences; they are however even more preferential in that normally: a) On a return on capital on a wind up the preference shares get their money out first. b) They do not normally attract votes although may acquire voting rights if e.g. dividends or redemptions are in arrears or if there has been a material breach of the shareholders agreement. Handbook of Venture Capital Documentation Page 261 c) Preference shares are normally redeemable i.e. they will be repaid in accordance with an agreed schedule, perhaps in three instalments from years 3 - 5. Redemptions can be at par, at a premium (from 10p - £3 is not uncommon); stepped to encourage early redemption; priced to give a certain overall return taking account of past dividends; at a price based on a percentage of net asset value. d) Preference dividends normally rank before 'A' ordinary dividends. Options Options can attach either to loans or to preference shares and allow the holders on certain defined parameters to convert normally into ordinary shares (less often into 'A' ordinary shares. WHY DO venture capitalists NEED OR WANT THESE COMPLICATIONS? a) Financial engineering. b) To give us protections which as a minority shareholder in a private company, we would not otherwise have. c) To give us the returns we need by a combination of factors; some investors may be more income than capital driven. d) To give us an exit from a lifestyle company, or alternatively, an attractive from an investment which we can't realise. e) To allow management to keep a majority of the company even though we may be putting up the bulk of the money. f) To prevent our having a subsidiary. g) To keep us below the shareholding levels allowed by our own rules (e.g. many venture funds will not hold more than 30%). h) To ally our requirements with other syndicate partners. i) To satisfy management requirements not to give up ownership at all. j) Expensive in the early days for the company but ultimately could be cheaper. k) To let us have our cake and eat it! WHAT ARE THE DRAWBACKS a) Management see our position as 'better' than theirs. b) Potential conflicts of interests between holders of different classes of shares. Handbook of Venture Capital Documentation Page 262 c) Don't sit easily alongside private investors who are tax driven. d) Often less suitable for very early stage investments. e) Cash coming out of the company when it would be better being reinvested. f) May reduce the capital value. g) We could be limiting our upside. h) Pressurises management into early redemptions to escape escalating redemption premiums/dividends. Handbook of Venture Capital Documentation Page 263 ORDINARY SHARES Advantages a) Allies everyone's interests. b) If unsuccessful, very cheap for the company and the management (in effect a grant). c) Needed for EIS investors to get tax relief. d) Allows simpler (and therefore less expensive) documentation. e) Builds up capital value within the company. f) Very suitable for early stage investments. g) Allows a greater equity percentage thus a greater return on successful investments. Disadvantages a) If successful, very expensive for the management shareholders. b) Tax driven investors may hamper a sale within 5 years. c) Still need some kind of investor protections. d) Returns only on a sale/flotation. e) May need differential pricing to protect against having a subsidiary. f) Inability to exit from a lifestyle or non performing company. g) Syndication with other institutions may be more complicated.