When a target company in Brazil is analyzed for the purpose of acquiring equity, one of the first points to be checked by the investor is the company’s cap table.
It is important to clarify that cap table does not only refer to the current corporate structure, but also other forms of participation – or a purchase option – that may be impacted in an M&A process.
It is extremely common for a start up to seek means of capitalization through loan contracts, crowdfunding and vesting, for example. All of these preexisting relationships represent direct and/or indirect corporate participation and, therefore, essential information to be gathered by any investor when evaluating the company, most of the time even before the due diligence itself.
It is essential, therefore, that the founders are concerned with the company’s cap table, avoiding the entry and exit of many partners, its outdatedness or disorganization, and, mainly, the way in which these relationships are formed, which could impact the evaluation of the investor, which in some cases can even lead to the business becoming unviable.
To avoid any loss it is important to take care with: (i) the existence of a written document between the company and initial investor (be it an individual, legal entity or investor pull); (ii) clear valuation criteria so that there are no doubts about the stake that each person has – or could have – in the company; (iii) indication of specific and objective conditions of which triggers lead to the eventual conversion of participation, mainly in cases involving the sale of equity interest to other investors; and (iv) drag along and tag along clauses.
These precautions are essential to the business and demonstrate to investors that the company is organized and ready for relevant investment movements, avoiding wasted time and stress on potential investors, which also helps to increase the company’s valuation.
