With the vigorous development of China’s venture capital industry, spa and sha agreements have become common investment agreements signed between investors and startups during financing. Understanding the connotations and differences between ts, spa, sha, and other agreements can help entrepreneurs better negotiate in the financing process. This article will focus on introducing the key agreements and structures in startup investment, mainly including ts, spa, sha, bridge loans, and typical clauses, hoping to provide a reference for entrepreneurs.
TS is a summary of key terms, SPA stipulates share transfer, and SHA stipulates shareholder rights
TS, namely Term Sheet, is a summary of key terms of the investment transaction reached between the investor and the startup during or after due diligence. It covers most core terms like financing amount, share class, valuation, liquidation preference, board seats, veto rights, etc. SPA, namely Share Purchase Agreement, corresponds to Capital Increase Agreement in China, focusing on defining rights between investors of a certain round and other shareholders. SHA, namely Shareholders Agreement, corresponds to Articles of Association in China, focusing on the relationship between investors and the company. TS summarizes core terms, SPA elaborates share transfer, and SHA elaborates shareholder rights. They form an interlocking whole.
Bridge loans provide startups with funding before official investment
Bridge Loan refers to a loan provided to a startup or founder before official investment. If the decision to invest is made, the bridge loan will become part of the investment amount. If not invested, the bridge loan shall be repaid by the startup or founder. After signing the SPA, startups can first get a bridge loan to safeguard cash flow, which serves as an ‘engagement gift’ protecting startups.
Typical clauses like liquidation preferences balance interests of investors and startups
Typical clauses in investment agreements include: liquidation preferences, anti-dilution provisions, ROFR, co-sale rights, drag-along rights, board seats, veto rights, indemnification, confidentiality and non-compete, information rights, etc. Liquidation preference means investors get paid first. Anti-dilution prevents share dilution. ROFR allows investors to buy new shares first. Co-sale rights mean investors can sell alongside founders. Drag-along forces founders to sell their shares if investors want to sell their stakes. Overall, these clauses try to balance the interests between investors and startups.
SPA, SHA, TS, bridge loans and typical clauses like liquidation preferences and information rights are key components in startup investments, allowing investors to better manage risks and maximize returns.