Transaction documents

Deeds recording the agreement between the venture capital investors and the target company are called transaction documents. These documents are essential for the establishment and transparency of the investment transaction.

Startup companies can fundraising in many ways. In addition to the increasingly popular crowdfunding, the majority usually choose venture capital investment. The basic condition of venture capital investment is that the company's affairs are transparent, and there is little chance of surprises and misunderstandings. 

To achieve this goal, almost standard format documents are used worldwide. This solution significantly facilitates cooperation and investments between the various actors of the global startup ecosystem.

One of the first steps in the investment process can be the business shares that provide preferential rights. These business shares provide the venture capital investors with special management and profit-making rights in the in the target company. Such a prerogative can be, for example, the liquidation preference or the right for preferred stock.

However, several important documents are required to create preference shares. After preliminary surveys between the investor and the target company, the investor makes a preliminary offer to the target company. A common form of this is the term sheet. 

A term sheet is a non-legally binding offer. The term sheet contains the amount of the recommended capital investment, the expected return, the rights and obligations of the parties. In addition, the letter of memorandum of understanding does not cover the required legal due diligence (due diligence) steps as well. 

Mandatory exclusivity and confidentiality can also be agreed upon at this stage of the negotiations. Overall, the term sheet formalizes the offer and provides protection for the parties to avoid misunderstandings and disputes.

The second important document is the amended or rewritten certificate of incorporation. The management and income-earning rights that have changed during the investment can appear in the company certificate. The amended document must be approved by the majority shareholders.

The next step of the transaction is the drawing up of the investor agreement. This document also contains a description of the business shares that provide additional licenses. This is a lengthy, thorough and already legally binding agreement between the investor and the target company. This document formalizes the special relationship between the parties with a detailed description.

In addition to the above, when documenting the transaction, the investor must also declare that he has the appropriate authorizations and permits. And the target company must authorize the investor to have access to financial and operational information during the current investment round. The target company can stipulate which information it can refuse to provide. The investment also requires the written consent of the owners with voting rights. 

Capital investment, acquisitions and mergers are complex and complicated processes. These transactions require sophisticated and up-to-date legal and economic knowledge. Almost without exception, these tasks are performed by specialized consulting firms or legal offices instead of the target company.