The Law of Corporate Finance: General Principles and EU Law: Volume III: Funding, Exit, Takeovers

6.2 Example: Venture Capital Transactions 289

6.2 Example: Venture Capital Transactions

The use of mezzanine instruments can be illustrated by venture capital. Venture
capital is often used where an entrepreneur wants to raise external funding for the
purpose of financing further growth or in the context of a management buy-out
(MBO) or buy-in (MBI). Venture capital investors will look for an exit within the
next three to five years. This may be by an IPO, a trade sale, refinancing by an-
other institution, or a repurchasing of the entire capital by management. A venture
capital investor can provide a mixture of debt, equity and mezzanine financing.^20

Table 6.1 Venture Capital and Private Equity

Venture capital Private equity
Seed Start-up,
early stage

First expan-

sion

Later expan-

sion

Spin-off,

MBO/MBI

Pre-IPO,
trade sale
Loss stage Profit stage

Process. There is a lengthy process before the firm can raise venture capital from
the market. Usually, the process takes some months. The screening of proposals is
intense, and only a tiny fraction of proposals will pass the test. From the perspec-
tive of the venture capitalist, the process could be as follows:

Table 6.2 The Process of Venture Capital Talks

Establishing

contact

Preliminary analysis Due

diligence

Negotiations

Initial dis-

cussions.

Confidenti-

ality agree-

ment.

Presentation

of the firm

and its man-

agement.

Visits to the

firm.

Review of the firm’s

business plan and cor-

porate strategy.

Rating based on the

last three financial

years.

Market analysis.

Indicative offer.

Preparation and sign-

ing of a Term-sheet.

Detailed

analysis

(technical, fi-

nancial, tax,

legal).

Verification

of informa-

tion disclosed

by the firm.

Drafting of

contract

documents.

Final nego-

tiations.

Signing.

Closing.

Completion.

Structure. Venture capitalists devote much attention to the structure of the deals,
and conditions imposed on firms are drastic. Venture capital deals usually in-
clude:^21

(^20) Weitnauer W, Kuhmann T, Meier HM, in: Weitnauer W (ed), Handbuch Venture Capi-
tal, 2. Auflage. C.H. Beck, München (2001) C 4; von Salis-Lütolf U, Risiko- und Ge-
winnverteilung bei privaten Finanzierungen, SJZ 97 (2001) pp 213–224; Groner R, Pri-
vate Equity – Recht. Stämpfli Verlag AG, Bern (2007) pp 1–14.
(^21) See Tirole J, The Theory of Corporate Finance. Princeton U P, Princeton and Oxford
(2006) pp 90–91.