knowledge | 15 May 2020 |
COVID-19: Practical Guidance for Start-Ups on Navigating a Fundraising in Lockdown
Fundraising is always a priority for early-stage companies, but never more so now that lockdown measures are in place across the work and business has retreated “behind virtual doors”.
Law firms and corporate entities alike have been ordered to work from home but, despite the challenges brought about by the COVID-19 pandemic, fundraisings at all levels (from seed funding, to Series A investment and beyond) are continuing to complete. Many clients have asked us what to expect in relation to their fundraising transactions in the current environment, both in terms of the process and the potential impact on deal terms.
This briefing contains a short summary of some of the main issues facing a start-up looking to navigate and complete a fundraising in the current lockdown conditions, along with some practical guidance on how we are able to complete transactions in this dramatically changing working environment.
The lack of certainty and increased market volatility will undoubtedly result in some potential investors reconsidering their decision to invest at this time, and there may well be a disparity between the respective parties expectation of valuation. Investee companies will obviously be keen to ensure the valuation reflects the full value for the business, whereas an investor will want to gain as much understanding as possible of the impact of COVID-19 on the company’s financial projections to support its own valuation. Valuations are likely to be lower than pre-pandemic expectations, but this may work to the investee company’s advantage in later fundraising rounds in the sense that it will give a better chance that its valuation will continue to rise from funding round to funding round and avoid a ‘down-round’ that could be very costly to the founders and other early investors from an equity perspective.
Due diligence and Virtual Negotiations
It is likely that your investor will place an increased focus on its due diligence efforts, not only on the impact of COVID-19, but as market conditions remain uncertain and volatile, increased caution is to be expected. Where relevant to your business, expect increased focus on specific issues impacted by a pandemic, including key contractual arrangements (e.g. force majeure, right to renegotiate or termination clauses); customer and supply arrangements; regulatory changes resulting from the pandemic and business continuity policies; ability to access emergency funding supports or reliefs; remote working and data protection policies and insurance terms.
From a practical perspective, physical onsite visits and traditional physical data rooms are unlikely to be possible (or desirable) in the near future, so remote alternatives need to be utilised. Equally, getting everybody “in the room” has been a tried and trusted method of getting a deal over the line.
The positive news for start-ups in need of funding is that in the legal sector virtual negotiations are increasingly becoming the rule, rather than the exception. Equally, it is now very common to conduct a legal diligence exercise for investor clients without the need for physical meetings or original documents. At McCann FitzGerald, we have a dedicated project services team to assist clients with building out their own bespoke virtual data room with our own platform. The project services team is also adept at utilising a range of artificial intelligence tools to increase speed and efficiencies with legal due diligence projects – a practice we can expect to see more and more advisors to adopt of in the aftermath of the pandemic and the global lockdown. Find further information here.
Increasingly, parties are seeking to include specific COVID-19-related provisions in the investment documentation, with the investor’s expectation that any attributable risk would be borne by the business and its founders, rather than the investor assuming that risk. We have seen a number of investors staggering their investment and agreeing to invest in agreed tranches only when certain milestones have been achieved to guard against negative impacts on revenues and profits post-completion. Specific warranties and indemnities regarding operational and financial impacts of the virus may be sought, along with more specific warranties on the status of key contracts; adequacy of supply arrangements, business continuity and disaster recovery plans, and data protection, whilst the investee companies need to be sure to make appropriate disclosures and avoid any forward-looking warranties.
Holding Shareholder and Board Meetings
As part of the fundraising process there will typically be a need for both shareholder and board meetings. The board will be required to approve the entry by the company into the relevant transaction documents and the issue of shares (or other relevant instrument) to the investor. A shareholder resolution may be required also, particularly where the investor is being issued with a new class of preference share or the provisions of the company’s constitution are to be amended.
The requirement for a physical meeting in either case is not generally required. Subject to the relevant company’s constitutional documents, the company law regime in Ireland permits board meetings to be held by telephone or other electronic means; or resolutions to be passed by way of a written resolution, dispensing with the need for a meeting altogether. Find more information on taking board decisions without a physical meeting here.
Similarly, private companies in Ireland are permitted to pass most forms of shareholder resolutions by means of a written resolution, provided they comply with the statutory procedures set out in the Companies Act 2014. While unanimous written shareholder resolutions would be the norm for most early-stage companies, sometimes logistics simply do not allow for this (e.g. if the company has a large number of shareholders or if a particular shareholder is uncontactable or uncooperative). In such a case, either a physical shareholder meeting or a majority written resolution will be required. In either case, advanced planning is key to ensure that any relevant notice periods are compiled and that these logistical issues do not end up unduly delaying completion.
Before holding a virtual meeting of the board or the shareholders, the relevant regulations of the company’s constitutional documentation should be checked to ensure compliance.
Approvals and Consents
Companies need to be mindful of the potential for delays in conducting the formalities required to complete an investment. Often in a fundraising transaction it will be necessary to obtain pre-emption waivers, shareholder or third-party consents. Where physical meetings are not possible, start-ups will need to round up these signatures remotely and rely on third parties to respond expeditiously to complete the transaction. While it has become increasingly common that these are delivered remotely, the potential impact on the transaction timetable should be considered and, if time is of the essence, collation of third party signatures should be prioritised. Advanced planning to identify these third party inputs is key, as is engaging in timely communication with the relevant parties to explain what is needed of them and when.
Execution of Transaction Documents and Remote Completions
As with virtual data rooms, it is now quite common for fundraising transactions to be completed remotely, when the parties and their advisers are all in different locations. There are well-established procedures and the parties involved should agree the completion mechanics early in the process to avoid any last-minute issues.
However, as we all adapt to life in the home office, execution of transaction documents (and evidencing that they have been properly executed) is inevitably more challenging than in the pre-lockdown world. Utilising a printer and scanner is by no means a novel concept, though availability of the relevant technology in the family home may be an issue. Equally, practical issues such as availability of signatories and the company seal can be difficult to overcome at very short notice, hence the key point is to ask the questions in relation to these practical issues early so that issues – and solutions – can be found with delaying completion or causing a minor (or major) panic.
Electronic signatures can be used instead of traditional “wet-ink” signatures to sign contracts and complete transactions. Electronic signatures have been available for a number of years but have not generally been used in Irish corporate transactions. Unsurprisingly, there has been a recent surge in interest in electronic signatures as they avoid the need to sign, print and scan paperwork, so they can be a convenient option when so many people are working remotely. While electronic signatures are a very useful option to have available, there can be some complications and should be used only with the benefit of appropriate advice. Find more information on signing documents from home here.
How can we help?
McCann FitzGerald is ready and willing to assist clients in addressing all of their concerns in respect of legal issues their business may face in responding to COVID-19. Please contact any member of the McCann FitzGerald Start Strong team to assist.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.