Startups

At a minimum: founders’ vesting and cliff periods, commitment to the business and non-competition clauses, reserved matters requiring reinforced majorities, share transfer arrangements (pre-emptive rights, drag-along and tag-along rights), unlocking mechanisms, and the assignment to the company of intellectual property created by the partners. It is the document that prevents a conflict between founders from becoming a conflict within the company.

The two most common methods are stock options — the right to acquire shares at a fixed price — and phantom shares — an economic right that mirrors the value of the shareholding without making the beneficiary a shareholder, widely used in Spanish practice due to their simplicity from a corporate law perspective —. In both cases, the scheme must set out the vesting schedule, the conditions for ‘good’ and ‘bad’ leavers, and what happens in the event of a funding round or a sale of the company.

They are different instruments. A convertible note is a form of financing that converts into shares in the next funding round, usually at a discount and subject to a valuation cap: it defers the discussion on valuation. The equity loan under Article 20 of Royal Decree-Law 7/1996 accrues interest linked to the company’s performance and is treated as equity for the purposes of capital reduction and winding-up, which strengthens the balance sheet. The choice depends on the stage of the business, the investor and the strategy for the next funding round.

The company’s corporate history must be above board and the cap table must accurately reflect the situation; there must be a shareholders’ agreement with vesting provisions; intellectual property — particularly software — must be assigned to the company and not remain in the hands of founders or freelancers; key employment and commercial contracts; compliance with data protection regulations; and the absence of litigation. Most of the issues that delay a funding round can be avoided if they are sorted out before the round is launched.

Registering the trade mark: with the OEPM for Spain or with the EUIPO for the whole of the European Union, before investing in it. Software is protected through intellectual property rights — computer programmes as such are not patentable — combined with trade secrets and, above all, with clauses assigning rights in the contracts of everyone who writes code: founders, employees and external developers. Without these assignments, ownership of the start-up’s main asset remains in doubt.

Vesting is the mechanism by which founders (or the team, in the case of an ESOP) gradually vest their shares or rights over time, so that those who leave early do not receive the same as those who stay. The cliff is the initial period — usually one year — during which no vesting takes place. Investors systematically require this: it protects the company and the remaining partners.

Generally speaking, not in financial terms: it sets out the investment terms subject to due diligence and final contracts. However, specific clauses such as exclusivity and confidentiality are usually binding. However, in practice, the term sheet sets out the financial terms and control arrangements for the funding round, and any concessions made in it are very difficult to reverse later on — it is therefore advisable to negotiate it with the same rigour as the investment agreement itself.