The statistics are loud and clear: investment in Spanish ‘start ups’ is booming. The € 326 M invested by Venture Capital funds in 2014 were clearly surpassed by the € 596 M invested in 2015. The statistics for year 2016 are yet to be announced, but we can clearly identify a bullish trend.
The investor considering investment in a ‘start up’ is attracted by the high potential presented by these companies in the early stages of their development. While this investor, who is willing to take risks, knows that a return on investment is never guaranteed, he wants to ensure his control over his investment is not lost, that he has an influence on the business decisions and can withdraw his investment at any time for as long as the company exists.
But first, what it is a ‘start up? A ‘start up’ can be defined as a company that has great growth potential. It differs from other emerging companies because it starts a revolutionary business in the market, generally with a strong technological element. ‘Start up’ is an innovative generic term. However, legally speaking it is like any other business which is set up and managed according to the rules governing Spanish companies.
Essentially, the rules governing a company are reflected in its bylaws. These are often drawn up to suit each company, but respect the strict limits imposed by the Companies Law. These limits affect the rules for the transfer of shares, the composition and functioning of the corporate bodies, majorities for adopting collective agreements, dividend payments, etc. It is precisely this statutory rigidity that bothers investors who have decided to allocate part of their portfolio to putting money into a ‘start up’. That is why it is advisable to draw up a Shareholders Agreement or Shareholders Side Agreement, which serves to complement and even surpass in many respects the provisions of the bylaws, giving the investor greater legal certainty and control over the company.
The Side Agreement is a contract between the partners in order to regulate the functioning of the company in all aspects of the business that the legislation does not allow to be introduced into the bylaws. This document determines the obligations the partners have with each other, aims to set up bespoke governance of the company, regulating the conditions of entry and exit of partners (investment and disinvestment) and partners voting rights, among others.
In many cases the Side Agreement is a key element in the success or failure of a ‘start up’. It defines with great precision how the relationships between the partners will develop and prevents the occurrence of problems in the future or, when they inevitably appear, regulates the mechanisms to solve them. On the other hand, if a Side Agreement is not signed, the disputes between the partners may make the company inoperative or ungovernable. This situation is catastrophic for a ‘start up’ because of the dizzying rate at which these companies appear and disappear, the fierce competition in the market and the relentless advance of technology that can make any business obsolete or completely outmoded – technology which up to a few months ago, did not exist. The consequence of all this for the investor is obvious: not only will it not bring any added value to your investment portfolio, but you may also have to sell at a loss.
The moral of this article is that a business model on its own is not the key to success. The advice of a lawyer throughout the life of the business is an added value as those self-employed people, whose ‘start ups’ went on to become big, well-established companies in the market, well know.
