It has been a turbulent year with various macro-economic headwinds. Despite these unusual times, these authors have observed several investment transactions happening in Singapore into early-stage companies with more investors from all over the globe investing in Singapore entities or holding companies in Singapore with subsidiaries in the region. Investors from Singapore have also been considering investment opportunities in Asia, Europe and USA that may fit their investment mandates. The landscape of fund-raising documents has also expanded in Singapore with increasingly more companies using documents commonly used in USA (such as the SAFE note and other documentation provided by the National Venture Capital Association (NVCA)) and requiring advice on amending such documents for compliance with Singapore law. Foreign investors are also keen to be informed the type of documentation being used in Singapore and how it may differ from what they are accustomed to back home.

In this respect, the authors seek to set out brief guidance of equity features and equity-related transactions documents often used in USA, Germany (and other European countries such as France, the Netherlands, and Belgium, as all of these countries follow the civil law system and, thus, similar legal principles apply with some adaptation to country-related specifics) and Singapore that can provide initial guidance to investors and founders of early-stage entities to better understand the legal documentation involved in each of these countries when there is a fund-raising event.

Equity features

When a company has successful conversations with an investor and reaches agreement on valuation in an equity financing round, the following classes of shares are typically considered for issuance to investors:

• Ordinary shares (also referred to as common stock in USA terminology) – this category of shares is the first class of shares issued on incorporation and are often held by founders and employee-shareholders. Whilst this category of shares may be issued to angel investors and institutional investors too, such investors typically prefer preference shares which is the next category of shares that can be issued by a Company. Preference shares would have priority over ordinary shares in the event of any liquidation or winding-up.
• Preference shares (also often referred to as preferred stock in USA terminology): this category of shares is often classified as a series of shares such as Seed Preference, Series A, B, C, D and beyond with each series of shares entailing separate terms and conditions relating to economics and control of the company - typically preferential (in terms of any distributions) to those of the ordinary shares or the earlier category of shares issued.

The creation of a new class of shares allows parties to vary the voting rights, dividends, and liquidation preference of the shares, amongst others, as well as determine whether such category of shares may be redeemable or convertible at the investors’ option, or upon the occurrence of any exit event.

Equity-related transactions document landscape

Once the category of shares to be issued has been determined, the typical round of fund-raising would involve several legal documents to be prepared with the key ones in USA, Germany and Singapore being the following (with a brief description of each document)*:

*The terminology, form or name of documents may differ in transactions but substance is often aligned with the above.

As evident from above, the form and substance of investment documents could be similar but also vary to some extent across jurisdictions. There are also instances when additional documents may be required depending on the requirements of the investor (often arising from due diligence on the company) and to plug any gaps in the company’s governance or corporate documents. For example, an Intellectual Property Assignment Agreement or Employment Agreement involving the founders and key executives may be required to be entered by the Company.

Growth of Start-up Ecosystems in Germany and Singapore

Whilst the USA start-up ecosystem has matured and is often seen as the key place for capital fund-raises and exits, global investors continue to consider Europe and Asia as alternative investment destinations which have also grown quite significantly and offer several interesting investment opportunities.

Germany - Like in Europe, the German start-up ecosystem has grown significantly over the last decade. Berlin is well-known as the start-up capital in Germany, but several German Federal States also host strong (regional) start-up ecosystems these days, notably, North Rhine-Westphalia, Baden-Wuerttemberg, and Bavaria. The year 2021 marked the most successful year for venture capital investments in Germany. Start-ups attracted investments in an amount of approx. EUR 4bn (or SGD 5,65bn), which placed Germany at rank #2 in Europe, just behind the United Kingdom, and followed by France and the Netherlands. The German unicorns Personio (HR management software), N26 (financial services), Celonis (enterprise software solutions), Gorillas (grocery delivery services), Trade Republic (financial services), Tier (ride sharing service), and WeFox (insurance and financial services) illustrate the diversity of the German start-up scene. Combined with a strong tech focus, access to corporate VCs backed by the German "Mittelstand" (family-own companies, which rank at the top of their individual business sectors), and an improved (public) funding environment, Germany will remain a strong player in the European venture capital scene.

Singapore - In Asia, Singapore’s start-up ecosystem has experienced significant growth in investments in Singapore-incorporated companies from institutional funds (both local and global). Some entities like Grab and PropertyGuru have also provided exits for shareholders by undertaking public offerings and listings in USA. Singapore is ranked at 5th position in Asia and 17th position globally as a start-up ecosystem according to the Global Startup Ecosystem Report (GSER) 2021 giving it top marks in funding, performance and talent access. The report valued the the ecosystem here at US$22.5 billion, higher than the global average of US$13.68 billion. Singapore is now home to more than 3,800 tech-enabled start-ups and the ecosystem is reported to have 190 accelerators/incubators and over 200 investors, to provide support such as financing, mentorship and talent.

Conclusion

Given the growth of start-up ecosystems, it is an exciting period for founders and start-ups with new business ideas and models being established in various verticals such as FinTech, MedTech, AgTech and Deep Tech. The push and motivations for entrepreneurship has never been bigger across Europe and Asia whilst various VC funds have also raised large amounts of monies for investments in interesting technologies that can help solve various pain points.

Yet, despite the euphoria of achieving in-principle agreement with investors or getting to a term sheet stage, the authors would recommend that one be mindful of one’s rights and obligations especially through involving lawyers or legal counsel from an early stage in order to provide appropriate directions and guidance on the transaction documents (which would vary across jurisdictions) as informed above. By understanding the legal documents and rights and obligations contained in such documents, founders and investors would be well placed to manage the company’s affairs and continue on the exciting growth path of an entity’s journey towards reaching high valuations.