The first thing to take into account, when you want to invite an investor to buy a percentage of the company, is the issue of protection of domains and trademarks.
This issue must be resolved and the aspect linked to this is the corporate-corporate issue.
You have to set up a structure, where there will be a holding company and, under the holding company, subsidiaries if you want to do the regional project.
By regional project it is understood that there are activities in Argentina, as well as in Brazil, as well as in Mexico, and in this way cover the most developed Latin American countries, and perhaps other countries as well.
That clearly implies a legal aspect, having to create this structure and the first question is usually: What type of companies do I use? I am also going to need a holding company that is the owner of the other companies. Where was it established?
There are several aspects to take into account, there is no solution that fits all cases. The solution can happen, in some cases, through aspects of the own activity that they want to develop in their company, clearly due to tax aspects and the issue of whether or not this holding company is going to have profits during the first years will be closely linked. and also the issue of incorporating investors into the regional plan.
The first step is to ask yourself 2 big questions:
1. Where am I going to put the holding company (owner of 100% of all the subsidiaries) and what kind of subsidiary am I establishing?
2. Am I going to have a company in fact, a limited company, LLC? You have to take into account where I am going to incorporate the inverter. Am I going to make it part of my regional project or only of my specific country plan?
In this regard, there are very important legal considerations, for example, many will have heard that an SRL is convenient for American investors, but in our country, an SRL cannot incorporate companies as shareholders.
The second step is to have this type of structure assembled.
And the third step is to consider the possibility of establishing some type of incentive program to incorporate shareholders. It is very common for Internet companies to incorporate people to join the project, through action programs. There is an advantage in doing it at the holding company level, if it is located abroad because many times the laws allow us greater flexibility.
A stock program consists of offering the possibility to an investor, a director, or an employee, of obtaining, through their efforts, shares tomorrow at the value that those shares have today.
These structures are acceptable and convenient for the funds and parameters of around 10 to 15% of the amount of shares that can be given in these types of programs to people you want to benefit are normally handled.
The third aspect that should be taken into account before inviting an investor to participate in the so-called “shareholder agreement”, is the agreement of all the shareholders of the group of the rights that each one will have in relation to the investors. and in relation to the exit strategies that you may need for the day you want to get rid of this project.
There you have to consider what happens if a shareholder finds an investor and wants to get out of the project, or wants to sell a part. Are the other shareholders going to have the right or not to participate in that sale? Are they going to have a preference in relation to the new shareholder that joins or are they not going to have it?
This is just one of the several aspects that must be taken into account and raised in the shareholders’ agreement before thinking about incorporating an investor. Having this structure from the legal point of view established, it is that the institutional investor is incorporated at the holding company level.
This is not incorporated by buying shares but rather by means of a capital increase, the previous shareholders are diluted and the investor incorporates money in exchange for shares and grows by creating a certain percentage of capital.
That capital is the holding’s working capital that can be used at the subsidiary’s level. This is implemented in the “subscription contract”.
There are a couple of contracts that are usually implemented around that time. One of them is what is called the employment contract, through which the investor asks the original shareholders for some type of control that commits them to stay for a while, generally between 2 and 3 years. They also agree not to compete, that is, the investor is going to provide the funds but is going to ask the shareholders to commit not to compete in the same area of the project.
Likewise, the shareholders’ agreement is renegotiated, the one in which each one had already agreed on their rights, the investor usually requests special conditions for its incorporation that have to do with the protection of minorities.
Normally, the investor buys less than 50% and then worries about two things: first, how the investment is going to turn out, which is why they usually require a commitment from the shareholders to, at the investor’s request, carry out an IPO.
In addition, they will ask you to establish clear guidelines and exit strategies.
To begin with, they are going to tell you that if you find a buyer, I, the investor, want to participate in that sale. This is called ” tag alone “. There are two basic ways to do this: one is by saying that the controlling shareholder agrees to only be able to sell if it includes the investor in its sale and incorporates all of the investor’s shares or, the most common is to say that the shareholders and investors will be able to sell proportionally.
Before joining, investors ask for a commercial and legal audit of the company.
Commercial and legal audit
Basically, the commercial audit consists of sitting down with the shareholders and asking them all kinds of questions about the business, in other words, how they think they will actually translate the business they are proposing. There will also be an accounting audit where some balance sheets will be reviewed and a legal audit where the contracts and documentation will be verified.
The investor wants to see that the brand is duly registered, just like the domain; that the companies are duly constituted, and that the contracts that have been entered into so far are duly entered into.
If all these contracts are negotiated satisfactorily, there will be a closing of the operation that will give rise to a capital increase and a meeting that will be held in accordance with the laws of the country where the holding company is incorporated.
The investor is going to deliver the amounts that he capitalizes, the number of shares is going to be increased and, at that moment, the shares are delivered to him.
This is the synthesis of the process that occurs from the day they decide to go see the investor, until the moment the operation is closed.
Suppose that we already have this project set up with its corresponding legal structure.
Although this corporate statement applies to any company, here is a new fact.
The material that this company is working with is intangible. They are doing something that is generally ideas, more or less novel, that are handled in this intangible area that is the Internet. And this environment is not regulated.
At the moment there is no regulation that establishes how contracts, contracts, and businesses are handled on the Internet. There is a Menen decree from 3 years ago that only says that the Internet cannot be regulated.
What is the origin of the business? Now the websites can be registered. The format, names, and derivative works are registrable. The National Directorate of Copyright may recognize me as a priority in the registration, but this does not make me the owner.
I must prove that I am the owner of something, with a priority that I have in the registration and the proofs (sketches, codes, algorithms, documentation of the process).
In turn, I will have a name, which I will have to register with another official body.
I will have a serious problem of what are domain address registrations.
Sometimes it is easier to register the .com than the .ar because everything depends on an organization called NIC., which is governed by the rule that the first to register is the first.
Once I have registered it, we already have the company set up, we have the name, we have registered the site, and there is its content. In other words, what do I want to sell, what do I want to do, understanding this, is the lawyer’s main task.
Once the project is defined and understood, see the agreements and contracts that are needed for this to work internally and who to claim if it does not work correctly: where it will be hosted, who develops it, who is in charge of maintenance, what the contract is like advertising (which are absolutely atypical) how are the distribution contracts.
And this arises from the clarity with which you have the project and that we can interpret it. This is what the investor sees, and if it is not well resolved, the investor may still be interested, but the company’s valuation will necessarily be lower since there is a greater risk.