AANZ 2019 Summit

2019 Angel Summit in Christchurch – Delivering exponential value … how growing a venture from New Zealand makes it uniquely possible!

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NEW CAPITAL RAISING TEMPLATES – Key Changes

Angel Association NZ has taken over stewardship of industry templates from the NZ Venture Investment Fund for angel and early stage investment transactions. We have recently released 5 new equity investment templates, which you can find here, that update and replace those originally developed over a decade ago. These documents include:

  • Term Sheet (equity investments)
  • Subscription Agreement
  • Shareholders Agreement
  • Constitution (for companies with ordinary shares)
  • Constitution (for companies with preference shares)

A year or so back the AANZ convened a working group of representatives from half a dozen law firms led by AANZ sponsor Avid Legal to update outdated industry templates. We are particularly grateful for input and support from Simmonds Stewart, Chapman Trip and Simpson Grierson. Below is a summary of the key updates and the rationale for these changes.

Explanatory footnotes 

Like all templates, these new documents are only a starting point.  The aim is not to impose a fixed set of terms on parties which may result in an agreement that is out of alignment with the context and intention of their investment.

With this in mind, explanatory footnotes have been included in the new term sheet.  These footnotes are not exhaustive, but aim to provide enough information for new users to:

  • understand the optionality and high-level impact of the various terms;
  • undertake further research, or seek independent advice, on the purpose and consequences of those terms; and
  • have greater confidence amending or removing terms that are not appropriate in the context of the investment.

As always, if in doubt, it is recommended that you seek independent advice from someone with experience in early stage company capital raising.

More efficient structure for follow-on investment rounds

A key structural change has been the move away from a combined “Subscription and Shareholders’ Agreement” to a separate:

  • Subscription Agreement – focusing on the present-day subscription for shares (investment conditions, payment terms, warranty and disclosure regimes etc.); and
  • Shareholders’ Agreement – governing the enduring relationships between founders, investors and the company.

Most early stage companies (and particularly tech companies) will go through a series of capital raising rounds as their capital needs grow over time.  Separating the documents allows the shareholders’ agreement to stand alone from the initial subscription terms so it is more easily (re)used and/or updated/amended, saving parties time and legal costs over multiple capital raising rounds.

Updates for recent market trends and law changes

Those familiar with the old templates will notice a number of shifts in the AANZ templates to align with recent market trends. At a high level, the AANZ templates display a softening of investor rights.  Again, it is important to emphasise that these positions are just suggested starting points.  Where parties land on various deal terms depends on the context of the investment, and the relative negotiating power of the parties. It’s very important to be aware of these factors when agreeing terms.

Some noteworthy changes include:

  • Calculating the issue price per share: The new term sheet clarifies how the issue price per share is usually calculated. Even some experienced investors and companies have struggled with the concept under the old documents. A separate blog post on this topic will follow soon if you wish to delve into the detail further.
  • Board composition:  The AANZ term sheet introduces a more flexible approach to board composition arrangements.  Under the old templates, some founders felt shoe-horned into losing control of the company’s board without giving the issue proper consideration.
  • Tranchingand milestones:  The AANZ templates move away from tranching investments unless the context provides sound reasons for doing so.  If tranching the investment is agreed, then the guidance is that proper consideration should be given to developing appropriate milestones.  The aim is to avoid unintentionally incentivising the company to pursue a milestone where that milestone is no longer in the best interests of the company.  Milestones should be linked to the company’s planned growth path, and align with key commercial objectives.
  • Anti-dilution:  If anti-dilution protections are agreed, then a “broad based weighted average” provision is suggested as the starting point.  This is comparatively more favourable to existing shareholders than the “narrow based” or “full ratchet” provisions that were seen in earlier templates.
  • Founder vesting:  Founder vesting provisions allow the company to take back a portion of a founder’s shares if that founder leaves the company within the vesting period.  The point of founder vesting is that:

o    it is unfair to the rest of the shareholders, particularly the other founders, if the founder leaves very early on in the life of a company; and

o    it may allow the company to use the equity (acquired from the departing founder) to recruit/incentivise the person who picks up the departing founder’s responsibilities.

The portion of founder equity at risk is often negotiated, and the AANZ term sheet provides general guidance based on recent market practice.  However, context is everything and vesting arrangements may be inappropriate if the founders have contributed significant cash, if there are appropriate vesting arrangements already in place, or if the company is at the more mature end of the spectrum.

  • NZVIF specific provisions:  The NZVIF specific provisions have been pared back to just the core reporting rights and prohibited business restrictions to align with NZVIF’s investment mandate. This allows parties to negotiate terms such as co-sale rights if it is desirable.
  • Simplified preference rights:  If preference shares are agreed, the AANZ template’s starting point is a 1x non-participating liquidation preference right without dividend preferences.
  • Regulatory updates:  The AANZ templates have been updated to reflect amendments to NZ’s Companies Act, and incorporate the requirements under the FMCA regime (including suggested safe harbour and eligible investor certificates to assist with compliance).

We intend to review the templates on an annual basis, and have a dedicated email address ([email protected]) for any comments to be submitted to the templates committee for consideration in such reviews.

We believe investors, companies, entrepreneurs and advisers will find the new equity templates user friendly, and a worthy addition to the NZ capital raising landscape.

 

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Start-up investment shows no sign of slowing

The latest Startup report shows a vibrant start-up ecosystem has developed over the last 10 years and there is exciting potential for future growth.

Young Company Finance Index data published in Startup Magazine by PwC New Zealand and Angel Association New Zealand reveals how far the start-up community has come and how important angel investment is for getting these businesses started. Key findings include:

– Total startup investment up from over $30 million in 2008 to over $110 million in 2018

– Cumulative investment since 2006 reaching over $600 million

– A growing number of cities outside the main centres establishing angel networks including Nelson, Tauranga and Timaru.

PwC New Zealand Partner Anand Reddy says, “By taking a look at the data we can see just how vibrant the startup community has become. This NZVIF data is consistent with the TIN100 reports showing New Zealand tech sector revenue growing from $6.3 billion in 2008 to $11.1 billion in 2018, with many initially angel-backed companies contributing to this growth.”

John O’Hara Angel Association Chair of New Zealand comments, “We have much to celebrate over the past 10 years of early stage investing and it is now a legitimate asset class attracting the attention of more institutional investors. We are starting to see green shoots for larger rounds of capital too with increasing syndication and more, and larger, early stage funds coming into the market. I do not believe it will be long before we can support successful businesses with New Zealand-led $10 million series A rounds.”

These findings form the basis of the latest edition of Startup Investment magazine, a bi-annual publication from PwC New Zealand and the Angel Association. It can be found online here or to download your copy click here.

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Dave Moskovitz named NZ Arch Angel 2018

One of New Zealand’s true champions of kiwi start-ups and angel investment, Dave Moskovitz, was awarded the Angel Association New Zealand’s (AANZ) Arch Angel Award at the 11th Anniversary NZ Angel Summit in Blenheim.

The Arch Angel Award is the highest honour in New Zealand’s angel investment community, and recognises individuals who reflect the qualities of the best angel investors and who are champions for the endeavour.

The award recognises the significant amount of time and money angels contribute to startups and early-stage companies – and specifically to their founders and teams – to help them reach their potential while also recognising angels who make a significant difference to New Zealand’s start-up ecosystem. The recipient is chosen by the previous years’ winners.

Dave has been investing in early-stage companies for a decade and been an investor director for a number of the ventures he has backed including ShowGizmo, The Appreciation Engine and Jaipuna. Most notably he was at the helm of peer-review publishing platform, Publons as Chair when that venture exited to UK-based Clarivate Analytics last year.

Dave has held governance roles with Wellington-based AngelHQ and was one of the founding fathers of New Zealand Start-up Weekends. He has mentored for 9 accelerator programmes helping dozens of ventures to secure funding and grow their businesses. Dave is an active member of InternetNZ, a member of the council of Open Polytech and was recently appointed to the Ministerial Advisory Group for Digital Economy and Digital Inclusion. He is also New Zealand’s representative to the Global Business Angel Network.

Former Arch Angel winner, Andy Hamilton, says one of the hallmarks of Dave’s work has been the importance he places on the role of empathy in business success.

“Dave takes a very genuine interest in supporting not just the success of the founders he backs, but also their wellbeing,” he said, noting that being a founder can be a very personally challenging role.

2012 winner, Movac’s Phil McCaw, who has worked with Dave over the years in the Wellington start-up and early stage investment scene, said Dave’s contribution to angel investment and start-ups in New Zealand is significant.

“Dave has freely given up countless weekends and evenings to work with people from all kinds of backgrounds who want to create new businesses. Making a difference and leaving the world better than he found it are integral components of Dave’s purpose. In investing in a number of these start-ups, he follows through very tangibly to deliver on that purpose.”

Speaking earlier in the year to Simon Morton on Radio New Zealand, Dave spoke with deep and personal insight about how successful angels and founders recycle skills and capital generating a virtuous cycle of further start-ups and cutting-edge roles in disruptive industries. He also spoke enthusiastically about the role start-up methodology could play improving the delivery of government services.

Dave received his award at the 11th Anniversary NZ Angel Summit, held at Marlborough Vintners in Blenheim and attended by 150 delegates. The annual event provides a hub for angels to learn and network, and is recognised as one of the world’s top angel events.

American born, Dave came to New Zealand over 25 years ago. He attended the University of California, Berkeley where he majored in computer science. He is one of three migrants to win the Arch Angel Award.

Former Arch Angel winners include The Warehouse founder and long-time angel investor Stephen Tindall; Andy Hamilton, chief executive of The Icehouse and member of IceAngels; US super angel Bill Payne; veteran angel investor Dr Ray Thomson; prolific AngelHQ member, Trevor Dickinson, former AANZ Chair, Marcel van den Assum and ardent angel investor, Debra Hall.

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Lead Partners

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