The crisis caused by the coronavirus pandemic is becoming increasingly widespread and globally perceptible, seriously affecting domestic startups as well as small and medium-sized enterprises (SMEs). Various proposed solutions have emerged in response, many of which would operate through different legal structures. Below, we examine the rescue programs of Hiventures Zrt., a member of the MFB Group, which are intended to provide rapid assistance to startups and SMEs that have found themselves in difficulty due to the crisis.
The investment funds managed by Hiventures that provide the financing are referred to below as the “investor”.
The intention to act quickly is clear, as both the Startup Rescue Program and the SME Rescue Program allow disbursement within as little as 30 business days, provided that the applicant company’s documentation receives a positive assessment. This is only a fraction of the time typically required by investors of a similar size to disburse such amounts. Since anyone using one of these packages must complete many tasks within this relatively short period, we consider it useful to provide a brief overview of the related contractual terms.
In general, the structure does not result in the more commonly known money-market loan-type transactions. Both rescue programs identify capital provided by the investor and a member’s loan as the form of financing. However, there is a significant difference in relation to the latter: while the Startup Rescue Program involves a convertible shareholder loan, the SME Rescue Program only involves a member’s loan. This means that the company receives financing largely in the form of a loan, while the investor also acquires a smaller corporate shareholding. A convertible loan gives the investor the opportunity, instead of reclaiming the loan in cash, to convert the loan it has provided into a shareholding of a specified size.
In general, rights such as the following are typical features of average equity investment structures:
- anti-dilution protection, meaning that if a new investor enters at a lower company valuation, the previous investor may claim compensation;
- drag-along rights, meaning that the company’s members may be required to sell their shareholding if the investor alone cannot fulfill a purchase offer — typically subject to limitations; and
- tag-along rights, meaning that if the members wish to sell their shareholding, the investor may join the transaction and sell its own shareholding together with the other member.
It is important to note, however, that the Startup and SME Rescue Programs are not structured entirely along traditional investment principles; they provide a more flexible structure. The following lists illustrate what rights the investor intends to retain under the rescue programs.
Investor rights under the Startup Rescue Program:
- liquidation preference — in the event of the company’s dissolution, the investor has priority in receiving a share of the distributable assets;
- general minority protection rights — under the general rules of civil law, these include the right to initiate the convening of a members’ meeting, a special audit, or the enforcement of claims on behalf of the company;
- pre-emptive right in the event of capital raising — instead of involving a new investor, the investor may undertake the further capital investment itself, although not in full, but only up to 25% of the capital intended to be raised;
- return preference — in the event of the sale of the company or part of it, the investor has priority in receiving proceeds from the sale, deviating from the proportion of its shareholding;
- drag-along and tag-along rights — of these, the former is available to the investor only in the event of a serious breach of contract.
As regards the rights already explained above, we do not repeat their definitions:
- liquidation preference;
- return preference;
- dividend preference — in the event of dividend payment, the investor is entitled to an additional payment within certain limits;
- put option — in the event of a serious breach of contract, or if the investor has not recovered its money even after seven years, it may sell its shareholding to the other owners or to the company.
We consider it important to draw the attention of startups and SMEs to the fact that both the company and the members/founders are required to make and comply with certain warranty and undertaking statements both when signing the transaction documents and when the investment is disbursed. It is worth examining these carefully, as they may entail significant liability.
Hopefully, Hiventures’ rescue programs will bring about the desired results, enabling both startups and SMEs to continue operating successfully and prosperously.
We note that this article was prepared on the basis of the content of a publicly available term sheet — a preliminary, outline, non-exhaustive and non-binding document prepared before contract signing — and definitions based on general practice. The agreements ultimately signed may naturally be more detailed, more specific and may contain new elements.