What's in the Vestd Articles of Association and how they work in different business scenarios
All companies on the Vestd Platform have the option to adopt the standard Vestd Articles of Association for free. These are based on the British Venture Capital Association’s template articles of association, which are adopted by many early-stage companies.
Our lawyers have added some additional clauses that provide some further functionality for companies.
Investments
- The Articles have been drafted with the intention that existing or future SEIS & EIS shareholders will not be impacted, with respect to meeting HMRC qualifying criteria (n.b. you must not be an existing shareholder for SEIS/EIS to be applicable). This includes allowing dividends to be paid differentially to different share classes, but ensuring that any share class subject to SEIS/EIS may not be given more dividends than any other share class, and thus does not put that class' SEIS/EIS eligibility at risk. Please check with your lawyers if you have any concerns about these being right for you.
- The Articles are compatible with and should not preclude any future crowdfunding.
Exits
- The Articles include “drag along and tag along” clauses in case of an exit. This ensures that any minority shareholders will have the right to be bought out in the case of the company changing hands, and the company can ensure that they are bought out, if they so want.
- The Articles are drafted to limit any issues in the event of a non-cash acquisition of the company, such that the purchase to go ahead without problem (Article 20).
Leavers
When a person or company will no longer be employed or work with your company, you will process them as a Good or Bad Leaver. A Bad Leaver is someone who's had their contract terminated or breached their contract, whereas a Good Leaver is someone who has left the company in good faith, such as for another job or health reasons.
- The company can serve a Leaver Transfer Notice at any time within 12 months of the Termination Date, which gives them the right to buy back some or all of the Leaver's shares.
- If the Leaver refuses to enter into the buyback agreement with the company, the directors can sign on behalf of the Leaver. It should be noted that transfers made under Article 14 will not be subject to pre-emption rights.
- The price paid for the Leaver’s shares will be affected by whether they are a Good Leaver or a Bad Leaver. If they’re a Good Leaver, they will be paid the greater of the total market value of the shares or the total subscription price originally paid by them, whereas Bad Leavers will be paid the lower of these two amounts.
It's worth adding that the Leaver Clauses above concern employee shareholders only.
Option holders are governed by their option agreement until they exercise their options and become shareholders, at which point they will be governed by the company's Articles of Association and any shareholders' agreement.
When you come to design an option scheme, you will be able to choose different Leaver Clauses that determine how a Leaver's options are treated.
Buybacks or transfers
- Buybacks are explicitly allowed by the Articles (subject to Board and Shareholder approval).
- The company has the option to buyback the shares of a leaving employee under certain specific conditions (if Articles adopted after June 2020).
- Price will be as agreed between seller and Board or based on a fair market value determined by independent valuer.
- Unless a share transfer is to a Permitted Transferee (by the Board), then all existing shareholders (excluding 'growth share' shareholders) have pre-emption rights up to the whole transfer, unless oversubscribed, in which case they access it pro-rata with their shareholding.
- It should be noted that buybacks can negatively impact SEIS and EIS relief.
Growth shares
If you wish to issue growth shares on the platform, you will need to adopt the Vestd Articles. The Vestd Articles:
- Allow for the issue the growth shares (called V Shares in the Vestd Articles) which can be either non-voting (Vn) or voting (Vv) shares.
- Ensure that, in the event of a reward requirements not being met, the growth shares in question can be partially or fully converted by the Directors into worthless “deferred shares” (Article 8).
- Allow V shares to be issued even after there is tangible value in the business without causing an income tax exposure to the recipient. Growth shares only benefit in the value growth of the business from the point of issue, so the recipient is not exposed to income tax on award, only capital gains tax on sale of the shares.
- Ensure that the value of the business will be shared correctly amongst the various shareholders on a liquidation event, depending upon the value of the business at the point at which the shareholder had originally received the shares (Article 5).
- Contain a mechanism by which we (acting via Vestd Nominees) can hold the V shares on behalf of their owners, so the share capital table is not fragmented with multiple legal owners (a fragmented “cap” table can put off VCs).
Click here for a brief overview of each article and its key provisions.
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