• A clean version for use in transactions
• A detailed Notes Version offering explanations and practical guidance

This updated version builds on the CLA that was previously published and includes several important updates based on feedback from founders, investors, and legal experts in the ecosystem.

The most notable changes include:

1. Updated definition of Fully Diluted Capitalization: the unissued option pool (and equivalents) is now included; Permitted Convertibles have been removed from the definition.
2. Conversion into depositary receipts via a STAK: a new option has been added to require smaller investors to convert into depositary receipts via a STAK (a foundation under Dutch law that holds the shares and retains voting rights, and issues and manages the depository receipts).
3. Increased flexibility for founders: the approval right for raising additional (convertible) loans has been removed. In return, a Most Favoured Nations (MFN) clause has been added, ensuring that existing lenders can benefit from more favourable terms in subsequent convertible rounds, with full replacement of terms rather than selective adoption.
4. Optional conversion cap (not in standard document): included in the Notes Version, following repeated requests. This provision is not part of the standard document but can be added if desired.
5. Cross Default: added to the list of Events of Default for improved lender protection.

As with all Capital Waters documents, we encourage users to read the Notes Version first. It explains the logic behind key clauses, outlines common alternatives, and offers practical context. Still, please make sure to consult with a lawyer before using the documents in an actual transaction. You’ll find a list of specialized firms on our Partners page.

We are especially grateful to Maurits Bos for his contribution to this new version, including the accompanying notes.

We hope this updated CLA will support you in structuring early-stage investments in a fair, transparent, and efficient way. Your feedback remains essential to keep improving our materials — we’d love to hear what you think.

We wish you smooth deal-making and look forward to catching up soon.

The Capital Waters Team

Stichting Capital Waters remains committed to providing practical tools and documentation that contribute to a more transparent and efficient ecosystem for startups and investors in the Netherlands.

We’re excited to share a new addition to our new toolkit: a standardized Cap Table Template in Microsoft Excel, now freely available to download. Please read the instructions in the workbook carefully.

Clear communication and transparency are essential when managing equity in a startup. Yet, in practice, inconsistent formats and confusing terminology often complicate the conversation between founders, investors, and advisors. With this new template, we aim to change that by offering a clear, user-friendly, and comprehensive cap table format tailored to early-stage financing rounds.

Built for Early-Stage Deals

This cap table is designed to support the most common scenarios in early-stage startup investments, including:

• Calculating of new shares, the template automatically calculates the issuance of new shares on a fully diluted basis, requiring less external modelling
• Conversion of Convertible Loan Agreements (CLAs), with support for multiple discount rates and valuation caps
• Option pool creation and expansion, both pre- and post-money
• SARs issuance calculations, pre-money on a fully diluted basis
• Flexible rounding preferences for share price and disbursement amounts

The goal is to reduce the need for external modelling and help all parties involved—founders, investors, and legal or financial advisors—speak the same language from day one.

A Joint Effort

This template is the result of a collaborative initiative that we’re incredibly proud of. Special thanks go to Rolph Segers (TNO) for initiating the project, and to Hessel Mittelmeijer (DeepTechXL) and Rogier Ketelaars (Innovation Industries) for their valuable contributions along the way. This collective effort has been instrumental in shaping the model.

A Practical Addition to the Capital Waters Toolkit

We see this cap table as a natural extension of the other templates and guidance already available at Capital Waters. We hope that it will become a practical tool used widely by the startup ecosystem, whether you’re raising your first round or supporting one.

Please make sure to read the manual on the “info” sheet. In order to properly use this sheet you need to enable iterative calculations. (File -> Options -> Formula -> calculation options -> check ‘enable iterative calculation’). All cells that you can safely edit are colored blue, with a gray background. All other cells should be left alone as they contain formulas.

If you spot a bug or have ideas for improvement, don’t hesitate to reach out. Your feedback helps us keep the tools relevant and reliable.

Coming Soon: Waterfall Sheet

Later this year, we’ll be releasing a Waterfall Sheet that complements this cap table—offering even more transparency into future liquidity scenarios.

In the meantime, we invite you to explore the new Cap Table Template and start using it today. You can find it here.

Capital Waters remains committed to providing practical tools and documentation that contribute to a more transparent and efficient ecosystem for startups and investors in the Netherlands.

The goal of this project was to make the equity part of the spin-off process more smooth. Discussions between TTO’s and scientific teams that want to start their own company based on scientific work done at the university can be long and painful. A lot of these discussions are usually around intellectual property. For this, last year the universities laid down transparent principles for the transfer of intellectual property to academic spin-offs that can be helpful in many cases (https://www.science-to-impact.nl/en/highlights/dealterms).

If universities take equity positions in a spin-off, there are also other arrangements to be made between the academic team, the spin-off and the university. Here’s where Capital Waters steps in. It safes all parties time and money if a well balanced standard shareholders agreement is available that can be used to facilitate this process. Therefore, we have worked together to prepare the documents that are now online. As a standard rule at Capital Waters, comply or explain applies. Parties may deviate from the standard agreement, provided that any changes are made visible to the other parties involved. The standard Ordinary Shares Shareholders Agreement is launched today at The State of Dutch Tech organized by Techleap and can be found here. The documentation is not static, we intend to publish an updated version every year. If you have any comments or feedback on these templates, please send us an e-mail to let us know.

Of course, this new Shareholders Agreement is not exclusively for university spin-off’s. Also other startups can use it. For companies that want to raise ordinary shares equity funding from early stage investors, we have also published a simple Subscription Agreement that can be used together with the Ordinary Shares Shareholders Agreement.

As always, we have followed a diligent process to come to the versions now published, taking into account the interests of all parties involved. Together with the University of Twente and Delft University we have prepared and discussed a first version of the Shareholders Agreement and made iterations thereof. We also had fruitful discussions and received feedback from the TTO’s of Eindhoven University of Technology and the University of Amsterdam and finally discussed a more advanced draft in our own Expert Panel which represents the interests of both startups and investors. We want to thank in particular Roy Kolkman for initiating this project and the inhouse legal counsels of Delft University and University of Twente, Judith Smit and Peter van Roosmalen for their support and cooperation.

We want to highlight a few items regarding the published documents:

• The Ordinary Shares Shareholders Agreement will in most cases be part of a larger set of documents. If you are a university spin-off, you will probably also need an Intellectual Property License Agreement or Intellectual Property Transfer Agreement with the university and maybe also a Facilities Agreement to keep using part of the university’s facilities. If you are not a university spin-off but are raising ordinary shares equity financing, you can use the Ordinary Shares Subscription Agreement next to the Shareholders Agreement.
• It’s an Ordinary Shares Shareholders Agreement, so the university or early stage investor will not get any preferred shares or preferential rights usually attached to preferred shares such as liquidation preference rights or anti-dilution protection rights. This makes the Shareholders Agreement fair and simple. At the same time, the agreement follows the same principles and definitions as used in the Capital Waters Preferred Shares documents, so the company is set for growth and can easily switch to preferred shares documentation when needed.
• The startup will have a Management Board that consists of the founding team. Attached to the Shareholders Agreement is a limited list of Management Board decisions that require the approval of the General Meeting of Shareholders by a – to be determined – qualified majority of votes. Also other important shareholder decisions require this qualified majority of votes, which can be two thirds, three quarters or whichever percentage agreed on. The Shareholders Agreement includes the option to install a supervisory board at a later stage.
• The Shareholders Agreement includes a lock-up period and vesting period for founders’ shares. Based on this, founders will lose any unvested shares when leaving the company early. The document also caters for bad leaver and good leaver situations and includes a mandatory offer provision that applies to all shareholders in case of bankruptcy or committing a criminal offence.
• The Shareholders Agreement has standard tag along and drag along clauses and a right of first refusal clause in case a shareholder wants to sell his shares (after the lock-up period). The agreement also includes restrictive covenants, a non-competition clause for founders and confidentiality restrictions for all parties.
• The Subscription Agreement has all customary warranty provisions and closing mechanics for an early stage equity investment. Attached to this agreement is a list of warranties. Depending on the stage of the company, this list might be a bit to extensive and can be shortened as needed.

Whether you are a university spin-off, academic institution or a startup raising ordinary shares equity funding, we hope you will appreciate the new model documents and use them in dealmaking. We will keep on working on providing startup founders and investors better (and free!) access to easy-to-use, balanced, and market-standard investment documents in order for you to save time and money when spinning out and doing venture deals.

Stichting Capital Waters

Don Ginsel & Sjoerd Mol

SAR plans provide the employee an economic right on the increase of share value, and have the character of a financial incentive without any ownership. Simple and easy to set up and taxed as salary. Depository receipt plans, provide a form of shares without voting rights and can work out more favorable from a tax perspective. However, depository receipts plans are more complex to set up and carry the risk of getting into valuation discussions with the tax authorities. It requires to issue shares to a Dutch stichting (foundation) that grants depository receipts of said shares to eligible employees. This creates a form of co-ownership, without direct voting rights for the depository receipt holders. The rights and obligations of the depository receipt holders are governed by the stichting’s trust conditions, the core document of your depository receipt plan.

Although neither a SAR plan, nor a depository receipt plan is perfect in all respects, as a startup you will probably go for one of those in order to attract and retain talented and skillful people. We are very happy to announce that we have now put online at www.capitalwaters.nl a standardized SAR plan as well as a standardized set of trust conditions for a depository receipt plan. By default, both plans provide non-transferable rights to employees or advisors of the company , that will vest quarterly over a 3 year period, starting one year after entering into the agreement. Should the company and the beneficiary let go of each other, then the non-vested rights are cancelled. In case of a Bad-Leaver situation, all rights will become cancelled.

The SAR plan can be used off the shelf in combination with the SAR agreement which is also made available. For the depository receipt plan, the trust conditions published online include standard terms and conditions that apply to the holders of depository receipts such as a vesting scheme and leaver provisions. They also include a deed of issue of depository receipts. The only other thing you need in addition is to set up a stichting (foundation) and issue company shares to the stichting. For this you have to involve a public notary.

Several notaries have already happily offered to set up notarial documents in line with the Capital Waters’ trust conditions for a reasonable fee. Please check out the list of notaries that have indicated to work with these documents here.

Of course, depending on the circumstances, you may want to tailor the SAR or depository receipt plan to your specific needs, but the documents published should provide a good set of standard terms. As always we have prepared the documents based on our three basic principles: (i) keep it simple, short and limit the legalese as much as possible, (ii) be neutral, not favoring any of the stakeholders more than the other, and (iii) have the documents open-sourced, make them available for everyone, free to use and free to adapt.

Hope you will enjoy using the documents, which as always can be found on our downloads page. Should you have any feedback or suggestions for new features, please let us know at info@capitalwaters.nl.

We have amended the Preferred Shares documentation more than we probably ever did. It is cool to see that the Capital Waters model documents are more and more used as a benchmark for balanced investment documents in many venture deals in the Netherlands and beyond. We know our responsibility in that respect, so we have not made any changes lightly. We have gathered feedback from our users and looked carefully at market trends and asked our Expert Panel to once again review the documents and come up with any suggestions for improvement.

The result is now online. Although we fully support the changes we have made, the documents are not intended to be a one-size-fits-all, so users remain free to adjust the documents to tailor to their needs, provided they take into account the license terms as shown on the front page of the documents.

We want to highlight the following changes:

• As we already changed in the most recent version of the Capital Waters Convertible Loan Agreement, we let go of the license condition that any changes to the Capital Waters standard must be shown in a compare version attached to the document. It is still a requirement for using the Capital Waters documents to show your counterparty what changes you have made to the standard, but you are free to choose in what form or manner.
• Since many preferred share deals are preceded by a convertible loan or SAFE round, we have included an optional clause about the conversion of convertible loans in the Subscription Agreement. For the equity investment itself, the standard still caters to a tranched investment (and share issue), but we have made clear that this is just an option, so the exception against the default position where the investment will be made in one go.
• In the updated documents, warranties are still granted against specific disclosures in a disclosure letter, although we see in the market many preferred share deals (also early stage) where the entire data room is considered disclosed information. We think the specific disclosure mechanism still fits most seed financing deals.
• In case there are multiple investors investing in the same round, we have included that any claims under the warranties must be supported by the investor majority (of a particular round), to prevent that one small investor may trigger an indemnification procedure that is considered not in the interest of the company and the investors by the majority of them.
• We have removed the requirement to add certain annexes to the warranty schedule such as the company’s articles of association and the financial statements but instead referred to the disclosed information. We have added a few warranties regarding open-source software and data protection while deleting a few others that were considered less relevant.
• In the Shareholders Agreement, we have included the right of first refusal in a separate clause with a bit more detail instead of referring to the mechanism set out in the bylaws. With regard to the drag along we have let go of the requirement to grant existing shareholders the right of first offer to facilitate an exit.
• We have included a clause regarding voluntary and mandatory conversion of preferred shares into common shares at the occurrence of a qualified IPO or with the consent of the investor majority. We have also added some additional items to the reserved matters schedule related to initiating an exit or IPO.
• We have included a mandatory offer clause for all shareholders (including the founders) in case of bankruptcy and a criminal offense.
• For founders, we have maintained the vesting clause, but changed this to allow for limiting vesting to a certain percentage of the shares held by each founder. In the leaver provision, we have added an early leaver category (founder leaving on his/her own initiative in the lock-up period) in which case he/she will maintain 50% of the value of his/her vested shares (in the currently published version early leaver is considered a bad leaver who loses all shares at nominal value).

We hope you will appreciate the new model documents and use them in dealmaking as so many of you did already. We will keep on working on providing startup founders and investors better (and free!) access to easy-to-use, balanced, and market-standard investment documents in order to save time and money when doing venture deals.

Don Ginsel & Sjoerd Mol

Given the uncertainty Covid-19 imposes on our daily lives, access to funding for startups and scaleups is likely to be even more challenging than it already is in less eventful times and accordingly being able to limit the time and costs spent on transaction is accordingly more important than ever.

In our desire to support the Dutch ecosystem for emerging companies and investors, we are happy to announce the launch of the newest version of the Capital Waters Convertible.

As always we have updated our template to cater for market developments and input received from our user base. In addition our highly valued Expert Panel has provided its insights, resulting in a new and improved version that can be downloaded here (as always free of charge). A list of the most notable changes is referenced below.

We hope our 2020 Convertible will benefit fundraising and as always we are keen to hear any comments you may have.

All the best, on behalf of the Capital Waters team and Expert Panel,

Maurits Bos

Changes in 2020 Convertible:

1. Our previous convertibles were “pre-money”, because initially startups were raising smaller amounts of money by way of convertibles before raising a priced investment round. Early stage investments have however evolved in the past few years, and startups are raising much larger investment rounds by way of convertibles (or similar investment instruments like SAFE’s or, our EPOS). Like several of our peers (among others Y-Combinator and 500 Startups), we have changed our convertible to being post-money. With post-money we mean that the money invested by way of our convertibles and similar instruments is taken into account when determining the Fully-Diluted Capital that is to be taken into account when determining the conversion. The convertibles will hence not dilute as a result of the funding raised through said convertibles and other instruments, but only as a result of the investment coming in by way of the Qualified Financing round.
2. We have simplified the conversion structure by removal of the conversion cap (and also did not include a floor) so the convertibles will always convert against the discount to the next round or fair market value that applies at conversion.
3. In a Liquidity-Event, instead of being eligible to payment of a multiple of the loan amount the Loan will instead convert against the Discount prior to the Liquidity Event.
4. We added pro rata rights for the investors, entailing that in connection with the investment round that will trigger the conversion, the investors that have provided the convertible loans are able to participate in the new round so as to not dilute their interest as a result of the new investor(s) stepping in.
5. Conversion at the maturity date is now done against the fair market value instead of a predetermined fixed valuation.
6. We have adapted our convertible to the new licensing format (https://www.capitalwaters.nl/blog/capital-waters-time-for-a-change/).

We founded Capital Waters with the goal of making early stage investing easier, to reduce time spent on negotiating deals and to reduce legal fees paid to lawyers. If we look back, we have to admit that we have reached this goal only partially. People use the documents, or part of the documents, add their own investor friendly or founder friendly flavor or deal specific elements to it and present it at the negotiation table as their own. The other side of the table is unaware which part is Capital Waters and which part is the add-on and therefore the full agreement needs to be reviewed in detail and negotiated on.

Creative Commons – the new format

We understand that each deal is different and that each investor or founder has its own preferences, but wouldn’t it be nice to know which part originates from Capital Waters and which part is added by the investor or founder? And wouldn’t it be even better if the party presenting the first draft would be forced to show the differences with the Capital Waters standard, so the discussion can focus on these few differences instead of the full agreement, including boilerplate and standard clauses? This is what we are trying to achieve with the new Capital Waters format.

As from today, the new Capital Waters documents can only be used under two restrictions: 1. You have to show the other side of the table on which parts (if any) you deviated from the Capital Waters standard, and 2. You have to keep a small Capital Waters sign in the header of your contract to make clear that you have followed the terms of use. In software, people are familiar with these restrictions under the license Creative Commons BY-ND 4.0. Or just ‘comply or explain’.

Expert Panel

At the same time, we wanted to put more weight on the status of the Capital Waters documents and make sure everyone, being an investor, founder or venture capital lawyer feels comfortable using the documents. Therefore, Benvalor as founding partner of Capital Waters has taken a step back to make it a joint initiative of likeminded people in the VC industry rather than an initiative closely linked to one particular law firm. We are operating Capital Waters now in a fully independent stichting (Stichting Capital Waters), we have removed the header ‘powered by Benvalor’ from the documents in the new format and have asked a number of experts of VC funds, startups and specialized venture capital law firms to support the initiative and join the new Venture Capital Expert Panel. We are grateful that the following people accepted the invitation to join our panel:

• Harm de Vries, Innovation Industries
• Paul van der Zanden, BOM Brabant Ventures
• Annemieke Jordans, startup founder
• Floor Veltman, Kennedy Van der Laan
• Patrick Munk, Vesper
• Antony Jonkman, LXA
• Maurits Bos, Benvalor

We have asked the panel to review the documents and suggest amendments where necessary. They all did in a very constructive way. We have discussed all suggestions made and have – on various items – updated the Capital Waters Subscription and Shareholders Agreement Preferred Shares, now divided into a separate Subscription Agreement and separate Shareholders Agreement. While making the documents better thanks to the panel’s feedback, we did not give in on our principle of making available fair and neutral transaction documents that are as simple and short as possible.

Step by step

We take this step by step. Today the Capital Waters Subscription Agreement Preferred Shares and the Capital Waters Shareholders Agreement Preferred Shares are published in the new format together with a Term Sheet for Preferred Shares deals. There are many more documents on Capital Waters, including a convertible loan and a common shares version. In the coming year we will convert them all to the new format. It takes some time because we want to do it good and of course involve the Expert Panel. The ‘old’ documents can still be used under the ‘old’ license (no restrictions).

If you now see the Capital Waters logo in the header of a document, you know that it is good stuff, that any changes made to the Capital Waters standard will be shown explicitly and that discussions can focus on these deviations. This will make doing early stage deals faster & easier, at least that’s what we aim for.

Best regards,

Don Ginsel & Sjoerd Mol

The lack of active pursuit by a company’s management to create an exit can pose a major problem for investors. This is especially true for investors operating in the form of an investment fund since these funds are often set up with a limited life span and need to be dissolved upon expiry of the fixed term. In order to be able to do that the fund-managers will need to have divested the funds’ assets and distributed the proceeds to the funds limited partners. One way or another, they must hence be able to sell their investments.

There are various ways in which investors typically ensure they can force an exit as and when they want. I will explain a few of the most often used ones below.

1. Forced sale

One way of facilitating an exit is to insert an obligation for the founders of a startup to work towards an exit after expiry or a certain period (usually between 5 to 7 years, the “Exit Horizon”). In the mildest form this clause can entail a reasonable efforts obligations for the management (and the founders) to strive for an exit within expiration of the Exit Horizon. Since this is a relatively vague obligation, unless management obviously frustrate the exit plans, it will be difficult for the investor to actually force an exit or claim that this clause is being breached.

Clauses with more severe obligations may force the founders/management to engage a corporate finance advisory to orchestrate and facilitate the sale of the company and to oblige the founders/management to use best efforts to facilitate and fully cooperate with the sales process and with the related due diligence process. The investor may also be granted the right to, in the event that the management does not provide sufficient cooperation with the sales process (at the investor’s discretion), replace the management in order to have new directors more motivated to effectuate the exit take point in the sales process.

2. Dragging founders out

Drag along rights are typically granted to shareholders representing a (super)majority of the share ownership in a company. When making use of the drag along right said majority is generally able to force the other shareholders to co-sell their shares (and hence effectively drag them out) to a prospective buyer who wishes to acquire the entire company. Thresholds (only against a higher valuation than the one against which the investor invested) or restrictions in time (only after x years) are often agreed upon which need to be passed before being able to enforce the drag-along in respect of the investor.

Investors however also often use the drag-along mechanism to be able to force an exit, usually after expiry of a certain period of time. If for instance the agreed Exit Horizon is exceeded without an exit having occurred, the drag along arrangements may pertain that the investor is then able to exercise the drag along right on its own in order to force the exit.

In order to protect the founders certain limitations can be implemented, like a minimum valuation that is required for the investor to be able to trigger the drag along right, or the clause initially only being enforceable in the event of underperformance of the business plan or requiring at least one or more other shareholders to agree. In addition, for the founders it is desirable to try and include a mechanism that gives them the right to buy out the investor before the investor is able to force them out by using the drag-along mechanism. This could be done in the form of a right of first refusal (“ROFR”), which would entail that if the investor has found an interested third party to buy all shares and effectuate the drag along right for, the investor would have to offer the founders the opportunity to purchase the shares against the same price and terms as agreed with the prospective buyer. This means that the investor will have to disclose to the prospective buyer that once a principal agreement has been reached (and quite some costs and time will have been spent by the prospective buyer) he will first have to go back to the co-shareholders to give them the chance to match the prospective buyer’s offer. This is generally undesirable for the investor given that potentially not being able to finalize a deal after having invested time and money may scare off prospective buyers, so giving co-shareholders a ROFR will often be fiercely contested by investors.

An alternative that is less controversial to investors and may be easier to negotiate for founders is a right of first offer mechanism, which entails that if the investor wishes to force an exit by using the drag along right, the founders/co-shareholders are first to be granted the opportunity to give the investor an offer (“ROFO”) for its shares (or that the investor will have to present the co-shareholders with a proposal containing the price and terms against which it is willing to sell its shares). If the offer is not accepted, the investor is subsequently free to offer its shares to a third party and exercise its drag along right provided the offer is better than the refused offer pursuant to the ROFO right.

3. Forcing redemption

Redemption rights grant the investor the right to require the company to repurchase the investor’s shares and hence give the investor an exit (again often enforceable after the Exit Horizon has been exceeded). The redemption price is often equal to the agreed liquidation preference, including accrued and unpaid dividends, but other redemption prices are also used (for instance a multiple of the liquidation preference, a fair market value notion, or the original purchase price plus a fixed annual percentage). Generally speaking the returns for an investor when enforcing redemption rights will be less spectacular, but at any rates it gives the investor a way out in the event it is running out of time.

A growing company is unlikely to have the cash required to meet the redemption. Often the company will hence be unable to repay the investors when they exercise their redemption rights. In such a scenario, the redemption clause will primarily function as an instrument to force the management to pursue an exit on a short notice. This may again result in a forced sale of the company or (part of) its assets. From the point of view of the company, mandatory redemption clauses are highly unattractive. Obviously, the exercise of a redemption clause may be the cause of a fierce clash between the founders and the investor.

Careful attention should also be paid to the limitations imposed by Dutch law. Restrictions apply to the redemption of shares which in short entail that the board of the company cannot resolve to effectuate a redemption of shares if either (i) the equity position of the company prohibits redemption or (ii) the company will not be able to meet its payment obligations in the foreseeable future as a result of the redemption. These requirements are created to protect creditor’s rights in the case of a repurchase of shares by the company. An alternative for a redemption clause is to have the founders grant the investor a put option under which the investor can sell its shares to the founders in the same manner as set out above. Thus, while not technically repurchasing the shares, the same effect can largely be achieved.

meaning that shares in a company are issued, but ownership only becomes permanent once certain conditions have been met. This condition usually being the same: that a founder stays on at the company (as manager) for a certain number of years and does his work properly. Vesting arrangements can either be concluded in a shareholders’ agreement between founders at incorporation, or at a later stage when an investor participates in the company.

Employee stock option plans often include a vesting scheme as well. I will not address this version in this blog, but note that the concept is pretty much the same for employees as for founders.

In this blog I will set out the most commonly used vesting scheme in the Netherlands and the different interests of such schemes for founders on the one hand and investors on the other.

Vesting explained

The parties to a vesting scheme wish to make the shareholding of certain shareholders (the founders or managers) conditional to their loyalty to the company. If the founder stays with the company for the agreed upon period, all agreed shares vest in that founder. Usually vesting is done in equal monthly, quarterly or even yearly installments of shares and parties agree on a cliff. A cliff meaning that vesting (in equal installments) only starts after a certain period of time, very often 1 year. During a cliff period either no shares vest at all or a certain part of the vesting shares vest all at once upon completion of the cliff period.

In the Netherlands every issuance of shares is done by a civil law notary executing a notarial deed of issuance of shares. In my example of a linear monthly vesting scheme over three years, it could be rather costly and time-consuming to keep up with all these changes. Instead the option of reverse vesting is therefor usually used.

Reverse vesting

With reverse vesting all shares are issued at once to the founder, but a vesting scheme is agreed upon, which is usually combined with a (good/bad) leaver arrangement. The founder that leaves the company before the total vesting period has expired, usually has to transfer all the unvested shares back to the company, against no consideration. Usually the founder is allowed to keep the vested shares (albeit sometimes the voting rights are then removed since it is often undesirable that a founder who has left still has a vote on important matters) or he has to offer these to his co-shareholders for market value.

An example vesting clause[1] with a one year cliff and linear quarterly vesting over the next three years:

The Shares will vest as follows:

• during the first year after the Effective Date, none of the Shares will vest;
• at the first anniversary of the Effective Date (“One Year Cliff Date”) [25%] of the aggregate number of Shares will vest;
• for the remaining [75%], the Shares will vest starting on the One Year Cliff Date on a quarterly basis, effective as per the last day of the last month of each quarter (each such date a “Relevant Vesting Date”), for a period of 36 months, resulting in a vesting of 6.25% of the total Shares per quarter, provided that the Founder is still in function as an [Employee/Manager] of the Group in the 1 month period preceding the Relevant Vesting Date; consequently, as from the fourth anniversary of the Effective Date, 100% of the aggregate number of the Shares shall have vested;
• in the event of a Liquidity Event all Non-Vested Shares will vest automatically.

If the above clause applies and the founder leaves after 20 months, only 37.5% of his shares have vested. The other 62.5% of his shares have not vested and so the Founder will not receive any compensation for the larger part of his shareholding in the Company.

It is important to note that, in principle, reverse vesting does not affect the control or voting rights of the Founders on unvested shares. To take the example above, in month 20 the Founder can vote on all of his Shares in a shareholders’ meeting, even if on leaving after said month he only receives compensation[2] for 37.5% of his shares.

Why do founders want it?

Why investors want to include a vesting scheme in the arrangement with the founders is obvious. They want to make sure that founders are not leaving the company shortly after the investors have stepped in. But why would founders want it as well between themselves?

Picture this: you have started a company with another founder, both holding 50% of the shares because you envisage and expect both of you to work equally hard to make the company a huge success in the coming years. Your co-founder however soon falls in love with someone abroad and decides to quit the company after one year to follow his heart. It would in that situation of course not be reasonable for you to keep on working your butt off for a lousy salary for years, until you finally succeed in making the company worth millions of euros, your co-founder all the while freeloading and becoming a millionaire on his 50% shareholding thanks to your efforts.

In summary

Vesting of shares can be a very useful concept to prevent founders leaving the company prematurely. If one of them does so anyway, a vesting scheme helps to come up with a reasonable shuffle of shareholdings. As reverse vesting does not affect the control or voting rights, the balance of power does not change during the vesting period, resulting in a transparent shareholders’ situation.

[1] This draft clause is based on the Capital Waters Stock Appreciation Rights Plan and Stock Appreciation Rights Agreement version 1.0: www.capitalwaters.com.

[2] Compensation for the vested shares can be limited (to for instance the nominal value of the vested shares) if a bad leaver clause applies and the Founder qualifies as such.

Why would you want to know your valuation? So you know how many shares you have to give away when raising money with an investor.

Assume you want to raise 400,000. Assume the valuation of your startup is 1,361,772. Then you have to give away 400,000 / 1,361,772 = 29.4% of your shares to the investor.

You can value your startup in 38 steps. Yes, that is a lot. But what are your options?

Should you take a guess? Good chance that your valuation is either too high or too low. A valuation that is too high means giving away too few shares. Giving away too few shares means no deal. A valuation that is too low means giving away too many shares. Who wants that?

Or should you ask the investor? That is like asking someone how much he would pay for your house. What do you think? Will he come up with the highest price? Or will he try to lowball you?

Anyways. About those 38 steps.

Steps 1-7: Cashflow planning

Step 1: Map out 60 months
To simplify only the first 6 months are shown. Assumptions are in blue. Calculations are in black.

Step 2: Estimate products/month
How many products will you sell each month? To simplify rounded numbers are shown. Calculations use the unrounded numbers.

Step 3: Estimate price/product
What is the price per product?

Step 4: Calculate cash in/month
Products/month in month 1 is 1. Price/product in month 1 is 2,000. So cash in/month in month 1 equals 1.1 * 2,000 = 2,000.

Step 5: Estimate cash out/month
What is the cash out each month?

Step 6: Calculate cashflow
Cash in/month in month 1 is 2,000. Cash out/month in month 1 is -24,219. So cashflow in month 1 equals 2,000 + -24,219 = -22,219.

Step 7: Calculate cash end
Cash end in month 0 is 0. So cash begin in month 1 equals 0. Cashflow in month 1 is -22,219. Equity in month 1 is 0. So cash end in month 1 equals 0 + -22,219 + 0 = -22,219.

Steps 8-10: Milestones

Step 8: Define milestones
When is your startup significantly de-risked? Assume with each 10x in products/month. A very crude rule of thumb: 10x for software and 5x for hardware. Products/month in month 0 is 0. So the first milestone would equal 0 * 10 = 0 products/month. That doesn’t work. Therefore, if products/month in month 0 is 0, temporarily assume it is 1 when you define milestones. So milestones are:

• 1 * 10 = 10 products/month
• 10 * 10 = 100 products/month
• 100 * 10 = 1,000 products/month
• Etc.

Step 9: Look up month/milestone
Look up each milestone in your cashflow planning.

You have 3 milestones:

• 10 products/month in month 24
• 100 products/month in month 48
• Because 1,000 products/month is outside your 60-month horizon, use the 316 products/month in month 60

Step 10: Look up investment/round
Before investment, you have a negative cash balance.

How much money do you need to achieve each milestone?

Milestone 1
To get from 0 products/month in month 0 to 10 products/month in month 24, you need to raise a Series Seed of 400,000 in month 0. This keeps your cash balance at 0 or more.

Milestone 2
To get from 10 products/month in month 24 to 100 products/month in month 48, you need to raise a Series A of 1,000,000 in month 24.

Milestone 3
To get from 100.0 products/month in month 48 to 316 products/month in month 60, you don’t need to raise any more money in month 48. Your cash balance is already 0 or more.

Steps 11-12: Funding strategy

Step 11: Choose Series Seed instrument
Which instrument will you use for your Series Seed: equity or a convertible? Assume you raise your Series Seed with equity.

Step 12: Choose Series A instrument
Assume your raise your Series A with equity.

Steps 13-17: Exit

Step 13: Map out rounds
Map out the rounds identified in the previous step. Include the exit.

Step 14: Calculate revenue/year
Cash in/month in month 60 is 632,000 (from cashflow planning). So revenue/year @exit equals 12 * 632,000 = 7,584,000.

Step 15: Look up revenue multiple
How much are investors willing to pay for a company in your region and industry, with a revenue/year of 7,584,000? Assume 4.0x revenue/year (market data).

Step 16: Calculate enterprise value
So enterprise value @exit equals 7,58400 * 4.0 = 30,336,000.

Step 17: Calculate equity value
Cash end in month 60 is 3,684,194 (from cashflow planning). So equity value @exit equals 30,336,000 + 3,684,194 = 34,020,194.

Steps 18-28: Series A equity

Step 18: Look up IRR/year portfolio
How much does the Series A investor want to make on his portfolio? Assume the IRR/year on his portfolio is 20.0% (market data).

Step 19: Calculate years till exit
The Series A investor exits after (60 – 24) / 12 = 3.0 years.

Step 20: Calculate money multiple portfolio
So the Series A investor wants a money multiple on his portfolio of (1 + 20.0%) ^ 3.0 = 1.7.

Step 21: Look up milestones till exit
How many milestones does the investor have till exit? The Series A investor invests at 10 products/month in month 24 (from cashflow planning). So he has 2 milestones till exit:

1. 100 products/month in month 48
2. 316 products/month in month 60

Step 22: Estimate probability/milestone
What the probability to get from one milestone to the next? Either you get there, or you don’t. So 50/50. Assume a 50.0% probability to get from 10 products/month in month 24 to 100 products/month in month 48. And assume a 50.0% probability to get from 100 products/month in month 48 to 316 products/month in month 60.

Step 23: Calculate probability till exit
So the probability to get from 10 products/month in month 24 to 316 products/month in month 60 is 50.0% * 50.0% = 25.0%.

Step 24: Calculate sub
So the Series A investor has a sub (for lack of a better word) of 1.7 / 25.0% = 6.9.

Step 25: Calculate retention
Because there are no more shares issued after the Series A, the investor retains 100.0% of his initial share percentage.

Step 26: Calculate money multiple startup
So the Series A investor wants a money multiple on your startup of 6.9 / 100.0% = 6.9.

Step 27: Calculate post-money valuation
So your startup has a post-money valuation @Series A of 34,020,194 / 6.9 = 4,921,903.

Step 28: Calculate shares%
Investment @Series A is 1,000,000 (from cashflow planning). So you have to give away 1,000,000 / 4,921,903 = 20.3% of the shares to the Series A investor.

Steps 29-38: Series Seed equity

Step 29: Look up IRR/year portfolio
How much does the Series Seed investor want to make on his portfolio? Assume the IRR/year on his portfolio is 20.0% (market data).

Step 30: Calculate years till exit
The Series Seed investor exits after (60 – 0) / 12 = 5.0 years (from cashflow planning).

Step 31: Calculate money multiple portfolio
So the Series Seed investor wants a money multiple on his portfolio of (1 + 20.0%) ^ 5.0 = 2.5.

Step 32: Look up milestones till exit
The Series Seed investor invests at 0 products/month in month 0 (from cashflow planning). So he has 3 milestones till exit:

1. 10 products/month in month 24
2. 100 products/month in month 48
3. 316 products/month in month 60

Step 33: Estimate probability/milestone
Assume a 50.0% probability to get from 0 products/month in month 0 to 10 products/month in month 24. Assume a 50.0% probability to get from 10 products/month in month 24 to 100 products/month in month 48. And assume a 50.0% probability to get from 100 products/month in month 48 to 316 products/month in month 60.

Step 34: Calculate probability till exit
So the probability to get from 0 products/month in month 0 to 316 products/month in month 60 is 50.0% * 50.0% * 50.0% = 12.5%.

Step 35: Calculate sub
So the Series Seed investor has a sub of 2.5 / 12.5% = 19.9.

Step 36: Calculate retention
Because there are more shares issued after the Series Seed, the investor retains 100.0% – 20.3% = 79.7% of his initial share percentage.

Step 37: Calculate money multiple startup
So the Series Seed investor wants a money multiple on your startup of 19.9 / 79.7% = 25.0.

Step 38: Calculate post-money valuation
So your startup has a post-money valuation @Series Seed of 34,020,194 / 25.0 = 1,361,772.

So what is your valuation?
1,361,772. OMG, finally! That’s how you value your startup when raising Series Seed equity.

We changed the definition of Valuation Cap to Conversion Cap in order to try to avoid the previous term triggering an argument with future round investors that the Cap should be considered the maximum valuation in the next investment round. Of course, it might not help much to only change the word valuation into conversion in the cap definition, but it could help a little. In our view it better serves the goal of the cap as a way of protecting the lenders under the convertibles against the company’s value skyrocketing, resulting in the stake the lenders end up with following conversion to be next to nothing without the cap.

We furthermore explicitly added that the Agreement terminates upon conversion, repayment of the loan or payment of the multiple in the event of a sale.

Finally we added that each party is prohibited to transfer the convertible or any rights/and obligations thereunder without the consent of the other party. For transferring an entire agreement pursuant to Dutch law the cooperation is already required (which is not entirely the same as approval, since cooperation can more easily be granted implicitly), but for transferring individual rights under an agreement such cooperation or approval is not explicitly required by law. This could mean that for instance an investor might be allowed to assign its right to convert under the convertible to a third party without the consent of the company, which might not be desirable. In order to avoid this risk the requirement of explicit prior approval is now inserted.

The new version can be downloaded here both in English and Dutch.

As always, should you have any suggestions, questions or comments regarding the revised Capital Waters convertible loan agreement, do let us know.

Finally, remember that the use of our documentation is at your own risk, so please read the disclaimer.

Maurits Bos, Benvalor attorneys-at-law