Slide 1 How Does Law Matter for VC Finance? Hermann Hauser Amadeus Capital Partners

Slide 2 Agenda Terms of investment Employment law considerations Exits Business Angel Issues The role of lawyers Insolvency law Company law Tax Fund structure

Slide 3 Terms of Investment Becoming more ‘valley style’ No confidentiality agreements please! Participating redeemable preferred structure –preference amounts increasing in multiples,impractical above ~3x ‘Financeable milestone’ driven Control over key business decisions held by VCs Board seat plus observer 10% to 20% Options, founder vesting Ratchets not ideal,but occasionally the only way to bridge valuation gap ‘Pay to Play’ becoming more common with anti-dilution Non-competes in investment agreement

Slide 4 Employment law considerations Option grants align CEO interests well Reasonable non-competes –Pass/fail test –Vesting linked to non-competes (untested) Redundancy laws make labour market less efficient (Sweden vs UK) –Harmonisation possibly harmful? Use of confidential information from previous employer ‘Service agreements are liabilities’

Slide 5 Exits Size matters in IPOs (£50m free float) –Institutions want liquid shares (and so do VCs) Despite relaxation of full list rules, AIM still suits smaller market cap companies UK still smaller market for tech Neuer Markt and EASDAQ less favoured IPO is perhaps the ‘end of the beginning’ and not an exit Trade sales more common (80:20) and often are an exit NASDAQ less favoured (high ‘running costs’) Often choose ‘best of breed’ GAAP (software)

Slide 6 Business Angel Issues Capital gains tax taper relief is big incentive AIM market tax benefits No longer the % threshold to qualify for rollover, now employment test Importance of networks (GEIF, Cambridge Angels)

Slide 7 The role of lawyers Lawyers –UK less commercial input than in the US –Warranties and indemnities Less experienced in UK with early stage deals cf MBOs etc Registration rights in US Some equity billing though less common now….. Price adjustment through warranty claim! VCs do not give warranties (escrow yes)!

Slide 8 Insolvency law Chapter 11 is better –Worldpop (article in FT) Attitude –Debtors gaol vs Henry Ford –good article in economist article on The Valley

Slide 9 Company law Most problems have workarounds –But don’t become a plc too early! Corporate governance can be dovetailed with regular board meetings Management accounts /board disclosure stronger requirements than statutes Financial assistance rules not forming a barrier

Slide 10 Tax Recent generous improvements to CGT –business asset taper relief –EMI options: now on disposal of shares Share options NI bad history

Slide 11 Fund structure ERISA if have US-sourced funds –Rights of use to VCs regardless Similar structures to US Differing tax regimes Limited liability company LLC

Slide 12 Conclusions Silicon Valley is still the model UK law getting closer to US –Share options –GAAP –Insolvency LLC Structures getting US like as well