Tag: Finance

Waqfs under Islamic law and trusts under English law are very similar. Both trusts and waqfs involve detaining property, leveraging a 3rd party to manage decisions for that property, and the eventual distribution of that property to a beneficiary. Still, both of them have key differences that make them entirely different. Not only are waqfs created uniquely, but they have some legal components that differ drastically from traditional English trusts. To fully understand trusts, waqfs, and the differences between them, let us break them down by definitions and legal components.

What is Waqf?

“A waqf was void without an ultimate charitable object.” Thus, outwardly at least, the motive for the creation of a charitable trust was to perform good works and please God. Only this declared motive was relevant to the validity of the trust.” — Influence of the Islamic Law of WAQF on the Development of the Trust In England: The Case of Merton College

A waqf is a charitable trust (or endowment) under Islamic law that is inalienable, irrevocable, and perpetual. The term waqf directly translates to “detain,” and a waqf can be thought of as detaining property for charitable or religious purposes for the sake of Allah. An essential component of waqfs is that the assets being donated cannot be consumable. In other words, money can be donated, but it will be invested, and the interest from that investment will go towards the charitable cause.

Here are a few legal waqf definitions:

• Qurba: Getting closer to God through good deeds.
• Waqif: The founder of the waqf
• Mutawalli: The trustee for the waqf

There are two different types of waqfs — waqf al-Khairi and waqf al-Dhurri.

What is Waqf al-Khairi?

When a person plans to donate property, buildings, or assets for the sole purpose of virtue and charity for Allah, they are creating a waqf al-Khairi. Those who create waqf al-Khairi will choose public or quasi-public interests (e.g., mosques, roads, religious institutions, specific groups, etc.) The primary thing to note about these trusts is that they are being donated directly towards public (or quasi-public) charitable causes from the start.

What is Waqf al-Dhurri?

When a person plans to donate to a charity but wishes for their next-of-kin to receive benefits from that donation, they would create a waqf al-Dhurri. Like waqf al-Khairi, these waqfs can be both public and quasi-public.

The primary difference between waqf al-Khairi and waqf al-Dhurri is the allocation of the principal interest of the donated assets. With al-Khairi, both the remainder and current income are donated to charity, while the al-Dhurri allocates the remainder to charity and the current incomes to a next of kin.

What is a Trust?

A trust is a legal arrangement whereby a trustee holds onto assets granted by a granter for the behalf of a beneficiary. Trusts can be used to benefit charity, shield wealth from taxes, and distribute income to children upon death. However, charitable trusts (a specific subset of the English trust) is remarkably similar to the waqf. In fact, some scholars recognize the Islamic waqf as a primary influencer of English trusts and trust laws.
But that does not mean that they contain identical components.

The Differences Between a Waqf and a Trust

There are 3 primary differences between waqfs and trusts. For the purposes of this article, we are speaking specifically of charitable trusts and waqf-Khairi — since they are most similar in goal, reach, and concept.

1. Waqfs are Religious or Piously Based

All waqfs are created to promote charity as recognized by the Shariah. All waqfs must be “ayn” (capable of being touched), and the vast majority of waqfs are property and usufruct. However, waqfs can also be a donation of money, in which case the money will be invested into income-generating projects or investments and the generated income will be utilized for the charitable purposes of the waqf (or descendants in the case of waqf al-Dhurri)

In English law, trusts are legal tools that are typically leveraged to shelter income or benefit children. There is an immediate difference in concept and utilization due to the nature of the trusts. Waqfs are religious or pious, and they are legally dictated by the Qur’an and the Sunnah. English trusts, on the other hand, are dictated by a variety of legal documents and can be created for any reason.

2. Waqifs Cannot Receive Benefits from Their Waqf

When a grantor creates a trust, he or she can list themselves as the beneficiary of that trust. In the case of living trusts and self-settled trusts, trusts can be utilized entirely as a tool to shelter income from taxes. Waqfs, on the other hand, require that the waqif receive no benefit from the waqf itself. The creation of a waqf is the benefit itself, and the creator is given Hasanah (or continuous “good reward”) through their charitable deed.

3. Waqfs are Both Irrevocable and Perpetual

Once a waqf is created, it cannot be revoked under any circumstances. The waqif has no rights to revocation and cannot give himself rights to revocation the moment that the waqf is announced. This is also important — waqfs are considered created the moment the waqif announces his intentions. Thus, the waqf is legal before legal papers are drawn up.

Waqfs are also perpetual. While the creation of a waqf immediately transfers assets to the charitable cause, waqfs can also be created posthumously. In this case, it would be dictated in the will — which is called a suspended waqf. In the event that the waqfs original beneficiary ceases to exist (e.g., a mosque eventually ceases to exist) the assets from that waqf will instead be utilized for one of the following:

• To benefit the poor
• To benefit religious knowledge
• To benefit a purpose nearly identical to the original purpose
• To benefit the upkeep of other waqf assets (i.e., the income of one waqf can be leveraged to pay for the upkeep of another waqf)

With English trusts, rights don’t have to be either perpetual or irrevocable. There are legal reasons that trusts can be revoked, and there are plenty of trusts that are not perpetual.

Businesses, investors, and individuals looking for assistance with waqfs or that are interested in establishing a waqf, contact us. Hammad & Al-Mehdar Law Firm is a leading Saudi Arabian law firm with over 35 years of experience, and we give people the legal tools to help themselves, their community, and the greater good of Saudi Arabia.

As part of ongoing efforts to make Saudi Arabia more accessible to foreign direct investment, the Saudi Arabian Capital Markets Authority recently issued Instructions for Foreign Strategic Investors Ownership in Listed companies (FSI Rules). The FSI rules allow foreign strategic investors to own shares from listed companies directly to promote the financial and operational performance of the listed companies. The CMA lifted the 49% cap on share ownership with effect from June 26, 2019. The aim of the new rules is for the Kingdom to reduce its overreliance on the oil-dependent economy since the global energy prices plummeted. CMA identified the equity market as a strategic industry to attract foreign cash industries by opening up shareholdings in insurance, banking, real estate, and petrochemicals.

Traditionally, foreign ownership of shares from publicly listed companies in the Saudi Kingdom has been highly regulated where foreign investors could not invest directly. Liberalization of the highly regulated regime commenced in 2015 with the introduction of the QFI Rules that allowed foreign investors to invest in listed securities indirectly through swap agreements with CMA authorized personnel for a period not exceeding four years.

Who Can Become an FSI?

Under the Capital Markets Authority, foreign strategic investors should be non-GCC legal entities. Non-GCC is defined under the definitions set out in the resolution of the Supreme Council of the Cooperation for the Arab States of the Gulf and satisfy the following eligibility criteria;

• Be established and licensed in a country applying similar regulatory and supervisory measures as the CMA. Based on this guidance, the CMA deems a country to be acceptable if it is a member state of the International Organization of Securities Commissions,
• The entity must hold a client account with the Saudi Arabian Securities Depository Center (Edaa), and
• Must meet any other requirement that the CMA deems applicable

FSI Restrictions

Despite lifting the cap on ownership of shares by foreign investors, the following limits validated by the CMA and relevant authorities in specific industries hold;

• Ownership limits: A foreign investor cannot be an FSI and QFI owning shares from the issuer listed on Tadawul at the same time. To hold stock from the same company at the same time, one must convert from FSI to QFI and vice versa by meeting the criteria set out in the FSI instructions or QFI rules where applicable. They will then transfer their shares from the FSI account to the QFI account, and vice versa.
• Trading limits: A Foreign strategic investor cannot dispose of shares owned, in accordance with the FSI instructions, before the lapse of two years upon purchase of the shares
• Limitations outlined in the bylaws of the listed company or guidelines issued by regulatory and supervisory authorities to which such companies are subject
• Other legislative restrictions of foreign ownership of joint-stock companies.

These strategic investment restrictions apply to all stocks listed in the Saudi capital market except for companies that prohibit foreign investor stock ownership, real estate firms with core investments in Makkah and Madinah, and companies operating in banking, insurance, and communication industries. Businesses listed under these categories are subject to regulations that limit ownership; hence, the share ownership limitation is 70%.

Other Considerations for FSI

• Regulatory approvals
  Despite deregulating the ownership of shares in Tadawul, FSIs are still subject to industrial regulations, especially for companies operating in banking, insurance, and telecommunications. In these industries, any changes in ownership of shares by FSI will need approvals from relevant authorities. This means that in addition to the two-year trade limit, an FSI will need additional mandatory permissions to be able to trade part of the strategic ownership
• Mergers and Acquisition rules
  If an FSI acquires 50% or more of the voting rights of a listed Saudi company after approval, the CMA can mandate the person to apply for a mandatory takeover bid to all the shareholders of the target. However, CMA may waive this rule based on the submitted appeal or its initiative.
• Competitions approvals
  Saudi Arabia’s competition laws provide that where a company wishes to acquire majority shareholding from another company and the transaction results in economic concentration, it must seek approval from the General Authority of Competition prior to completion of the acquisition. GAC will review and vet any transaction relating to mergers and acquisitions in major industries in the Saudi market to determine if the purchases will result in economic concentration. The vetting process takes 60 days.
• Listing rules
  Under Tadawul’s listing rules, the minimum float required for a company to be listed in the primary market is 30% and 20% for listing in the Parallel market unless the CMA approves a lower threshold. Even though FSI instructions do not impose minimum or maximum limits on strategic shareholding, the maximum FSI shareholding in the Main market is 70% and 80% for the Parallel market at any given time, subject to other investment restrictions

The implication of FSI Instructions to Saudi Arabia

Since the approval of the FSI instructions, the Kingdom of Saudi Arabia has reported an increase in foreign cash flows. The number of foreign investors rose by 163.7% to 1,195 investors as of 20/06/2019 compared to 453 investors in January. Moreover, the ownership percentage of foreign investors in the Capital Market increased to 7% as of 20/06/2019, compared to 4.7% in January.

Additionally, lifting restrictions for FSIs will allow international banks to hold majority stakes in commercial lending for the first time since the 1970s. The Kingdom’s government issued a directive in 1970 compelling foreign financial institutions to sell their majority shareholdings in local operations to Saudi nationals.

The liberalization of stock ownership is part of Saudi Arabia’s ongoing efforts to open up its capital markets to foreign direct investment and lower its reliance on oil. Local shares have been introduced in the FTSE emerging markets index and MSCI market benchmark to attract further foreign direct investment. Through these benchmarks, the Kingdom’s watchdog hopes to solidify Tadawul as the primary stock exchange in the MENA region. The move guarantees foreign investors wishing to invest in the territory protection from regulatory obstacles.

For more information about CMA rules and regulations, contact us and get insight on how to facilitate best-in-class growth of a private business.

Saudi Arabia recently eliminated the cap for foreign strategic investors in shares of listed companies. The Kingdom eased its rules to increase international funding and diversify its investor base. This decision will allow foreign strategic investors to purchase controlling stakes in the nation’s economic sectors that surpass 49 percent. By 2030, their financial regulator expects the relaxed rules to raise foreign investment to ten percent of the nation’s GDP. International investors can purchase majority ownership in the country’s commercial lenders for the first time in almost 40 years.

The Capital Market Authority (CMA), based in Riyadh, adopted the Foreign Strategic Investors’ Ownership in Listed Companies instructions. According to the nation’s regulators, the new laws will increase their market’s attractiveness and efficiency. It will also expand Saudi Arabia’s institutional investor base. There will be no maximum or minimum limits placed on foreign investors concerning the ownership of listed companies.

According to the CMA, these steps align with the Kingdom’s Financial Sector Development Program objectives outlined in its Saudi 2030 vision program. The directive also adheres to its Financial Leadership Program, a strategic program launched by the nation. These instructions will go into effect on the date of their publication. Additionally, the CMA board amended the Rules of Qualified Foreign Financial Institutions Investment in Listed Securities (Subparagraph (a\2) of Article (14). They also changed paragraph (2) of Part (3) of the Guidance Note for the Investment of Non-Resident Foreigners in Parallel Markets.

In the 1970s, the Kingdom forced foreign lenders to sell majority stakes in local operations to Saudi residents. Currently, the largest foreign strategic investors in Saudi Arabia are HSBC Holding Plc, Credit Agricole SA, and the Royal Bank of Scotland Group Plc.

During a telephone interview, Bloomberg News spoke with the CMA Chairman Mohammed El-Kuwaiz. “Saudi Arabia, increasingly, is open for business, not just or local investors but for international investors,” the regulatory official said. “It is ironic, I would say, that Saudi is rapidly opening up and embracing the world in a period when the rest of the world seems to be closing down.”

Saudi Arabia started introducing market reforms four years ago to help attract international investment and issuers. The Kingdom’s stock market remains one of the largest in the Middle East and Africa. According to data collected by Bloomberg News, the exchange has a capitalization of $540 billion.

In 2019, the Saudi Stock Exchange has seen an expansion of its international cash flow. The number of qualified foreign investors (QFI) in emerging market indicators rose from 453 QFIs to 1,195 in June 2019. This data represents a 163.7 percent increase. Additionally, the ownership percentage of QFIs in the Saudi Capital Market has skyrocketed from 4.7 percent in January 2019 to 7 percent. QFIs have made investments and purchases worth 51.2 billion riyals ($13.6 billion) by May 2019, and now own 6.6 percent of the nation’s equities.

Although the CMA has relaxed the 49 percent cap on foreign strategic ownership in publicly traded companies, other rules and limitations still apply. For example, industry authorities will need to approve deals that surpass the thresholds in different sectors such as petrochemicals and banking.

Chairman El-Kuwaiz said that the Authority has seen a huge request for investment from non-financial foreign investors. The CMA decided to grant approval on an exceptional basis to this select strategic foreign investor group. Non-financial foreign investors can now invest in Saudi Arabia’s listed company holdings.

According to the Capital Market Authority, qualified foreign investors (QFI) are individuals or companies that can invest in securities listed on the Saudi Stock Exchange in accordance with its rules. These laws regulate how foreign financial institutions invest in the Saudi Stock Exchange listed securities (including equities, debt instruments, and funds).

To qualify as a QFI, an applicant must be a financial institution that has a legal personality that falls into one of the six categories. QFIs must be either banks, brokerage or securities firms, insurance companies, government or related entity, investment fund, or Authority-eligible financial institution. Additionally, the applicant must possess assets under management equating to a SAR 1,875,000,000 (one billion eight hundred and seventy-five million Saudi Riyals), an equivalent amount, or more.

Additionally, the financial institutions must be licensed or monitored by jurisdictions who have standards equal to the CMA’s. The agency must provide an Authorized Persons (AP) who have a dealing or custody licenses in jurisdictions that apply regulatory and monitoring standards equal to the CMA, or pursuant to its Financial Action Task Force (FATF). Newly established financial institutions can submit applications to qualify as QFIs however, they must meet the nation’s minimum assets under management requirement.

Assets under management include those owned by the applicant or its group for investment purposes or owned by foreign portfolio managers or its group. An applicant (or account for another person related to the financial institution) can manage this account. These include assets owned by a foreign portfolio manager or their group for the account of another person or people.

The Kingdom requires strategic investors who buy stakes in a listed company to hold their investments for 24 months before they can sell them. This period doesn’t apply to those who already hold shares in listed companies unless they purchase more. The two-year rule will apply to the new shares.

For a full list of rules, please read the Capital Market Authority’s “Frequently Asked Questions on the Rules for Qualified Foreign Financial Institutions Investment in Listed Securities.”

Are you a foreign investor seeking to invest in Saudi Arabia’s growing economy? Trust the Hammad & Al-Mehdar Law Firm to handle your legal affairs. We are an industry giant with more than 35 years of legal experience. In 2018, the Islamic Finance News named us the Best Law Firm in the category of Mergers and Acquisitions. Our team has veteran attorneys that specialize in international civil law and common law. We can help you in our nation’s sectors, including private equity and venture capital. We also hold alliances with several international law firms. You can trust our attorneys to handle your legal needs. Contact us today for more details.

What is an ESOP

An employee share ownership plan (ESOP) is a type of employee benefit plan that is intended to encourage employees to acquire shares or ownership in their company. Most companies create employee share ownership plans to provide the motivation, inspiration, and retention associated with ownership. Employees can buy the shares directly, be given them as bonus, receive share options, or obtain shares through a profit-sharing plan.

ESOPs are very common with publicly listed companies, but are also seeing a growing adoption rate within privately held companies as well. Companies regulations in Saudi Arabia, the UAE (ADGM, onshore, and various free zones), the Cayman Islands, and the BVI accommodate structuring ESOPs and offering employees ownership schemes, with various applicable parameters.

Benefits of ESOP

An ESOP typically yields a higher pay and set of benefits for employees than mere financial, while creating true job security and gratification. This plays well with cash-strapped startups and growing companies. ESOPs are most commonly used to attract, motivate and reward employees. That said, there are other uses commonly seen in other markets such as the U.S. where ESOPs are also used for tax-related purposes. Employees with share entitlements feel united, validated and more invested in the success of the company. An ESOP can be a great tool for a company looking to attract otherwise expensive talent, enhance organizational performance, help employees prepare for retirement, and allow business owners to create liquidity to meet growth or diversification goals.

Establishing an ESOP

The common approach to establishing an ESOP is for the company to establish a trust of which the company’s employees are beneficiaries. The employees then make contributions to the trust via the employer (usually through payroll deductions or bonus allocations), and the trust in turn purchases the shares of the company. These purchases are allocated to the benefit of the individual employees beneficiaries of the ESOP. The other approach is to allow the employees to directly own shares in the company, but this may result in added formality hurdles in connection with KYC and transfers.

Companies can allocate contributions to employees in a number of ways, but contributions usually revolve around signing bonuses or the employee’s years of service and compensation. A formal plan document is developed and published setting forth the terms and conditions of the ESOP, and describing how the plan operates, who is eligible to participate, and who performs administrative and trustee functions.

After becoming fully vested, the company “purchases” the vested shares from the retiring or resigning employee. The money from the purchase goes to the employee in a lump sum or equal periodic payments, depending on the plan. Once the company purchases the shares and pays the employee, the company redistributes or voids the shares. In most instances, departing employees do not take the shares with them, only the cash payment. Fired employees often only qualify for a portion of their vested shares.

Considerations relating ESOPs

As attractive as the benefits of ESOP are on different aspects, there are some considerations companies and management should keep in mind when contemplating establishing an ESOP. Setting up the structure for the ESOP is relatively complex. Administration is also an ongoing task that requires specialization attention. Most commonly, these are done through attorneys or specialized administrators, which means that they do come at a cost. In addition, if an employee terminates his/her employment or passes away, the company will most likely be required invest some money to repurchase that employees shares.

Is ESOP Right for you?

An ESOP, or employee share ownership plan, is a great tool to attract, motivate and retain talent. It creates a sense of belonging to the employees and enable them to feel connected to the company and its management. It can also foster a sense of transparency and shared ownership. That said, it also requires administration and management, and if mismanaged, can be a source of dissent and claims against ownership, which are red flags for investors and funders.

The Liquidation Preference term is frequently used in fund-raising rounds. It is a major economic term to be negotiated in the term sheet between the founders and the investors, and is arguable the preference of the preferred shares.

Definition of Liquidation: A liquidation is the procedure according to which a company dissolve its business. Prior to such resolution the company goes through a number of steps with the aim of settling all its financial obligations to third parties and distributing any excess assets to the shareholders. Such liquidation occurs with a trigger, which is commonly named a “Liquidation Event” Liquidation Events usually includes:

• A merger or consolidation (other than one in which shareholders of the company own a majority by voting power of the shares of the surviving or acquiring company).
• Sale, transfer of all or substantially all of the assets of the company.

Liquidation Preference: In Venture Capital (“VC”) deals, the Liquidation Preference functions as a protection to the investors, granting them the right to get paid first when a Liquidation Event occurs.

• The Participating Liquidation Preference “Double Dip”:

In the Liquidation Preference with Participation, the preferred shareholders (ex. the investors) are eligible to receive the Original Subscription Price[1] in addition to accrued dividends plus declared and unpaid dividends. Thereafter, the preferred shareholders will participate along with the ordinary shareholders (ex. the founders) on a pro rata basis in the distribution of the remaining assets. In effect, the preferred shareholder receive its invested amount first, the shares in whatever is left, if any.

• The Non-Participating Liquidation Preference:

In Liquidation Preference with Non-Participating, the preferred shareholder will only be eligible to receive the Original Subscription Price in addition to the accrued dividends plus declared and unpaid dividends. But this does not mean that the shareholder does not participate in the upside, because fundamental to such election is the preferred shareholders right to convert their shares to ordinary/common shares at any time. Therefore, if the liquidated assets after the satisfaction of third party obligations are equal to or less that the Original Subscription Price, the preferred shareholder will not convert, and will receive all the liquidated assets.

If however, the liquidated assets less obligations are more than the Original Subscription Price (i.e the company was sold for a profit), the preferred shareholders will convert their shares to ordinary shares and receive Pro-rata a portion of such assets.

There are two (2) more commercial terms that are commonly used in the Liquidation Preference and frequently negotiated between the founders and the investors and they are as follows:

• The Multiple:

In the Multiple, the preferred shareholders shall have the right to a multiple of the Original Subscription Price. This can be added to a participating or non-participating liquidation preference. For a better understating of this term, let’s assume the following:

• The investor invests USD 1,000,000 in a company and receive preferred shares.
• The pre-money valuation of the company is USD 3,000,000.
• The post-money valuation of the company is USD 4,000,000 (investment amount + pre-money valuation).
• This means that the investor will have 25% of the company’s share capital (investment amount divided by the post-money valuation of the company).

Case 1: The parties agree to a 2x Participating Liquidation Preference.

In this case, the investor will have the right to receive USD 2,000,000 (the investment amount x2) in addition to the accrued dividends plus declared and unpaid dividends, thereafter the investor will have the right to participate along with the ordinary shareholders (usually the founders) on a pro rata basis in the distribution of the remaining assets. So, if the Company had sold its assets and had USD 10,000,000 to distribute to the shareholders, the investor will receive USD 4,000,000 (2x investment amount + 25% of interest). If the Company had USD 4,000,000 to distribute to the shareholders, the investor will receive USD 2,500,000. If the Company had USD 2,000,000 to distribute, the investors will take it all.

Case 2: The parties agree on a 2x non- participating Liquidation Preference.

In this case, the investor will have the right to obtain USD 2,000,000 (the investment amount x2) plus in addition to the accrued dividends plus declared and unpaid dividends without participating with the ordinary shareholders in the distribution of the remain assets. Otherwise, they can elect to convert their preferred shares to ordinary shares, forgoes the liquidation preference and participate pro-rate.

If the Company sold its assets and had USD 10,000,000 to distribute to the shareholders, the investor can elect between remaining preferred shares and receiving USD 2,000,000, or convert and receive USD 2,500,000 (25% of USD 10,000,000) of course they will convert. If the Company had USD 4,000,000 to distribute, the investor will keep its preferred shares and receive USD 2,000,000.

• The Cap:

The Cap is designed to protect the founders and keep a balance between all the shareholders by putting a ceiling on how much the investor can receive.

Following the above example, the below demonstrates the use of the Cap in a Liquidation Preference clause.

Case 1: The parties agree on a 2x Participating Liquidation Preference with a 3x Cap.

In this case the investor will have the right to obtain USD 2,000,000 (the investment amount x2) in addition to the accrued dividends plus declared and unpaid dividends. Thereafter, will have the right to participate along with the ordinary shareholders on a pro rata basis in the distribution of the remain assets up to USD 3,000,000. However, their participation shall not result an amount more than USD 3,000,000 (the investment amount x3).

If the Company sold its assets and had USD 10,000,000 to distribute, the investor will receive USD 4,000,000 as the example before. But if had USD 20,000,000 to distribute, the investor will receive USD 5,000,000, only (2x investment amount + 25% of the rest with a cap of 3x investment amount). Without the cap, the investor would have received USD 6,500,000.

Conclusion:

The Liquidation Preference is a major term in VC investments, and we highly advise all the founders to fully understand it and to appoint a counsel to negotiate it on their behalf. The Liquidation is not necessarily a disaster or unfair for the company, but if not negotiated, it can remove the incentive of the founders to sell early, and the cling on to a higher valuation.

[1] The Original Subscription Price is the price of each share issued to the shareholder. It differs based on valuation.

A fundraising for a startup is always good news and helps in the growth of the company. That said, the process accompanying any round of financing can be lengthy and complicated, especially when not well planned, structured, or organized.

An entrepreneur seeking to raise fund should firstly consider if she/he is prepared to lose a chunk of her/his equity in the company and subsequently be diluted as long as the company is moving forward. The prevailing thought is: a smaller slice of a bigger pie.

We previously discussed the transactions documents needed for the completion of a round of financing http://www.smelaw.com/introduction-seed-round/. Transaction documents, however, are not everything, and a large number of startups, especially the early stage ones, underestimates the efforts and time required to close a round of financing.

In this article we highlight the major points, we commonly see necessary to properly close a round of financing, and the different solutions to reach this goal.

The goal is closing not signing.

Founders in a fund-raising scenario are focusing on completing the paperwork as fast as they can in order to obtain the investment amount needed for the growth of their company. they commonly expect investors to pay as soon as the subscription agreement is signed. Unfortunately, the signature of such agreement or the whole pack of the transaction documents does not mean it is time to receive the investment amount. The investment amount will be due when the company fulfill its conditions precedent and reach the closing as defined in the subscription agreement.

What is Needed to Close a Round of Financing?

In a typical round of financing, the investors usually set some conditions to be completed by the founders in order to release the investment amount. These conditions vary from a company to another, and they are based on the due diligence exercise conducted by the investors. They tend to address risks the investors see needing remedy.

Here are some of the conditions that we usually come across for early stage companies:

• Corporate restructuring for the company;
• Rescinding of certain agreements executed by the company; and
• Intellectual property protection measures to address intellectual property risks.

Our advice to the founders in relation to reaching a proper closing for the round of financing is to follow four (4) basics rules.

• Hire a competent VC lawyer to represent you and the Company;
• Always speakwith the lead investor; keep the lead investor up to date with the growth of the company and familiarizes it with the conditions precedents and their expected time impact set by the investors before finalizing the transaction documents;
• Start working to work on the conditions set out by the investors once they are identified without any delay, even before the signing of the transaction documents; and
• Set out a rational closing date, accommodating the negotiation period of the transaction documents and the timeline required for the fulfilment of the conditions precedent.

In addition to the above, we advise the founders to be prepared for the required paperwork related to the issuance of the shares for each investor and the procedures to amend the company’s articles of association, where necessary. These procedures usually involve many submissions to various authorities.

Running Out of Cash

In case the startup is rapidly growing and investment funds is immediately needed to keep the company working, the founders, directly applying rule number two (2) above and keeping the lead investor up to date with the growth of their startup a part of the investment funds to be advanced in the form of a Convertible note (such as a SAFE Note). This can allow all parties a reasonable time to complete the transaction without the risks that result from a rushed job.