Term Sheets, SHAs, and Investment Agreements

Investment Contracts in the EU and Czech Republic: Key Concepts and StructuresI. Core Contract Types and StandardizationInvestment transactions typically involve three main contracts:Shareholders’ Agreement (SHA): Defines governance and shareholder rights beyond constitutional documents.Investment Agreement: Records the terms of the actual investment (share issuance or purchase).Term Sheet: A preliminary, mostly non-binding summary of proposed investment terms.Standard templates from groups like BVCA and Czech Startup Documentation help streamline deal-making with market-standard language in English and Czech.II. Shareholders’ Agreement (SHA)Purpose: Clarifies shareholder relationships and governance, especially in VC and PE deals.Key Terms:Governance & Board Composition: Investor board rights, reserved matters (veto rights).Information Rights: Access to financial reports.Founder Commitments: Lock-ups, non-compete clauses, good/bad leaver rules.Transfer Restrictions: ROFR, Tag-Along, Drag-Along.Anti-Dilution & Pre-emption: Protection against share dilution.Dividends & Liquidation Preference: Preferred rights and investment return priority.Exit Provisions: Sale or IPO triggers.Boilerplate: Confidentiality, governing law (often Czech law), arbitration, counterparts.III. Investment AgreementPurpose: Outlines how investors acquire shares and provide funds.Key Terms:Investment Terms: Share class, purchase price.Conditions Precedent: Shareholder approvals, no material adverse change.Warranties & Representations: Statements on company financials, IP, liabilities.Covenants: Promises for conduct pre/post-closing.Closing Mechanics: Share transfer, payment process, notarial deeds.Termination: Rights to exit before closing.Boilerplate: Similar to SHA.IV. Term SheetsPurpose: Outlines proposed investment terms; generally non-binding except exclusivity and confidentiality.Typical Sections:Valuation & Investment Amount: Pre/post-money valuation, price per share.Share Class & Security: Series A, preference rights.Use of Proceeds & Board Composition.Investor Rights: Liquidation preference, dividends, anti-dilution.Founder Vesting & ESOP Requirements.Protective Provisions: Investor consent rights.Legal Terms: Exclusivity, confidentiality, governing law.V. Case StudiesCzech Tech Startup SHA: Governance, share classes, exits.Phoenix Action v. Czech Republic: Importance of good faith and legality under BITs.Saluka v. Czech Republic: Emphasizes fair treatment and legal certainty.Workhuman Dispute: Highlights the risks of unclear SHA terms.Term Sheet Trends: PwC data confirms widespread use of option pools, preferred shares, and other standard terms.VI. Cross-Border and Bilingual ConsiderationsLanguage Clauses: Dual English-Czech versions common; specify prevailing language.Legal Formalities: Czech law may require notarization (e.g., capital increases, share transfers).Dispute Resolution: Arbitration often preferred for neutrality.VII. Recommended ResourcesModel agreements: BVCA, Invest Europe, Czech Startup Documentation.Legal references: Czech Civil Code, Business Corporations Act.VIII. ConclusionA clear grasp of SHAs, Investment Agreements, and Term Sheets—alongside proper localization and legal diligence—is essential for navigating investments in the EU and Czech Republic. Templates help, but tailored drafting ensures protection and clarity for all parties involved.