Digital Health Update: Irish Fundraising Trends for Digital Health Businesses
08 December 2020
As 2020 has progressed, we have continued to see massive investor appetite to partake in funding rounds for certain types of business – in particular technology and medical technology related businesses. Some such Irish investment rounds in 2020 have been significant sizes.
If you are an investor considering investing in an Irish company, or you are a business considering raising equity funding, it is important to be aware of some key deal trends in the Irish market, as follows:
When Irish businesses are raising investment, that investment tends to come from a range of international geographies, as well as from Irish investment houses. The most typical geography of an investor in investment transactions we advise on, is the US (this is far more prevalent than investments by Irish-based investors, which would be the second most common investor geography on our transactions). Investment by US private equity and venture capital investors into growing Irish businesses is something we regularly encounter, especially on the larger investment rounds.
A private equity or venture capital investor will always be focused on its exit and the value of its return on its investment. The deal documents will always include various rights and obligations setting out the extent to which an investor will have the right to trigger an exit process, or even a hard right of sale at a given value if the exit process fails. The latter is much less common and tends to only be capable of being invoked in very specialised circumstances.
Sale rights and protections
Drag along rights are a standard feature of Irish shareholders’ agreements / constitutions. Tag along rights, pre-emption rights on transfer of shares, and pre-emption rights on allotment of shares are also usually included. The question with many of these deal terms is not whether they are included, but the nuances within the relevant clauses. For instance, it is important to consider carefully which shareholders are to be capable of dragging others into a sale.
Also, although pre-emption rights on transfer are a useful protection for shareholders in a company, it is important to consider whether shareholders are permitted to sell their shares at all, or whether “lock-in” restrictions on such sale should be included.
Secondary element to fundraising
In a minority of the equity investment deals we advise on, the investors acquire some shares from the existing shareholders, as well as investing new money into the business for its working capital, in exchange for new shares in the business. We tend to see existing shares being sold as part of these transactions in some private equity deals rather than venture capital deals, and this only tends to happen in businesses that are throwing off considerable revenue, rather than in other fast growth, high value, but low revenue businesses. However, in the right circumstances, this can be a really positive deal term for investors and founders alike, and can be very popular with private equity investors as a way of bringing out the best long-term performance from management.
It is more common than not to include anti-dilution rights in Irish investment deal documents. This gives investors comfort that if there is a subsequent “down round”, the investor will be made whole on its percentage shareholding in a subsequent exit.
It is typical for a long-form suite of warranties to be provided by the investee company to the investor(s) in an Irish Investment Agreement. These still tend to be capped at the full investment amount – which is quite different to M&A trends, in which we are increasingly seeing lower percentage caps as against the consideration amount. More often than not, those warranties are supplemented by further warranties from a member of the founder or management team. This tends to be capped at a low multiple of that individual’s salary (we see anything from 1x to 3x) or another agreed six-figure sum. On some smaller investment round prior to Series A stage, we sometimes see a shorter form set of warranties, of say 4-5 pages.
A trend we have observed on Irish transactions over the past number of years, is that as well as the typical suite of warranties, specific indemnities are usually provided by the sellers in M&A transactions, relating to specific known risks which are uncovered by the due diligence process.
Conversely, it is extremely unusual for specific indemnities to be included in investment transactions. This is due to the nature of the transactions. Sellers are not exiting the business with significant sums of money, and any sort of claim by an investor under the warranties / indemnities following an investment transaction is highly unusual – as part-owners of the business once their investment has been made, such an investor would consider such a claim to be partially against itself. When investing in fast growth businesses in particular, investors typically accept that there will be risks and matters to be perfected, and do not usually escalate those matters to an indemnity item, as a buyer typically would in an M&A transaction.
Data Room Disclosure
We expect to see a data room produced by the investee company and its advisors, as part of the due diligence process on investment transactions. A question that sometimes arises is whether the Data Room is to be generally disclosed in the Disclosure Letter, meaning that any matter which has been included in a document in the Data Room in such a way that is sufficiently clear and fair that a reasonable investor could assess the nature of the matter or risk, will be deemed to be an exception to each of the warranties.
In Irish transactions – both M&A and investment transactions – we find that it is unusual for the Data Room to be generally disclosed in the Disclosure Letter. However, there will be competitive situations, particularly auctions, where competitive tension can be used to ensure that an investee- / seller- friendly term of this nature is baked into the deal.
We do not use an “industry standard” investment agreement as the starting point on investment transactions in Ireland. However, the same documents which were used on the prior round of investment into a given business, tend to be used as a starting point on the next round of investment into that business. What this means is that the negotiations on the deal documents themselves do not always take as long as can be the case where the documents are being produced and negotiated from scratch. This can assist in closing a round of funding relatively quickly, and means that the deal terms on investment transactions can often be agreed quicker than can be the case in M&A deals.
In conclusion, when approaching an investment transaction, it is important to assess the deal terms that you want included in the documents, and to understand market trends for transactions of this nature in the Irish market.
Should you have any queries about any of the above issues or about any other aspect of doing a corporate transaction in the Irish market, please contact Robert Dickson or any other member of our Corporate Department.
The content of this article is provided for information purposes only and does not constitute legal or other advice.