Question 1

What is the difference between pre-money and post-money?

Accepted Answer

Pre-money valuation is the value of the company before the investor comes on board; post-money valuation adds the amount raised in the funding round to that figure. The investor’s stake is calculated on the basis of the post-money valuation: one million out of four pre-money is equivalent to twenty per cent. From a corporate perspective, the valuation is reflected as a premium on the capital increase.

Question 2

What is the settlement preference?

Accepted Answer

This is the clause that ensures the investor recovers their investment, once or several times, before the other shareholders receive any share of the distribution. It applies in the event of liquidation and, by agreement, in similar circumstances such as the sale of the company. Depending on whether it is participatory or not, it determines the actual distribution regardless of the announced valuation.

Question 3

Why do funds require founders to undergo a vesting period?

Accepted Answer

Vesting subjects the founders’ shares to gradual vesting, typically over four years with a minimum holding period of one year. If a founder leaves before then, the company or the other shareholders may acquire the unvested portion, depending on whether the founder is a ‘good leaver’ or a ‘bad leaver’. For the fund, this ensures that the team underpinning the valuation remains in place.

Question 4

What is the difference between a ‘drag-along’ and a ‘tag-along’?

Accepted Answer

The drag-along right allows the majority shareholders who accept an offer for 100 per cent of the shares to compel minority shareholders to sell on the same terms. The ‘tag-along’ right is the reverse of this; it entitles a minority shareholder to join the majority shareholder in the sale at the same price. Both are set out in the shareholders’ agreement.

Question 5

Which part of a funding round term sheet is binding?

Accepted Answer

Generally speaking, it does not create any financial obligations, including valuation, but exclusivity, confidentiality and the sharing of costs usually do; furthermore, withdrawing in bad faith from advanced negotiations may give rise to liability. The terms set out in the memorandum of understanding form the basis of the investment agreement and the shareholders’ agreement, so it is advisable to negotiate it thoroughly.

Question 6

What is an anti-dilution clause?

Accepted Answer

It protects investors if a subsequent funding round is closed at a lower valuation – a so-called ‘down round’. Under the full ratchet model, the investor’s entry price is recalculated to match that of the new round; under the weighted average model, the adjustment is proportional, which is the more common formula. It is implemented by issuing additional shares, thereby passing the dilution on to the founders.

Question 7

What does a fund look at during the due diligence process for a start-up?

Accepted Answer

The focus is on share ownership and the clarity of the cap table, ownership of the technology and the assignment of employees’ rights, agreements with previous investors, data protection and contracts with key clients. The findings are reflected in covenants, closing conditions or valuation adjustments.

VC / Private Equity

The first legal intelligence platform for venture capital in Spain.

Real-time deal flow

AI-powered classification

Valuation multiples

Integrated compliance

What does the result mean?

How is a sector multiple factored into the pre-money valuation of a funding round?

What they rely on

What people ask on venture capital and investment rounds

On the blog

Managing a fund or investing in startups?