ICC Activities

Starting to negotiate

Emily O’Connor
Director, ICC Knowledge Solutions, Global Policy

In the last decade, the number of start-ups has increased rapidly and a new legal consultancy speciality has emerged to support these entrepreneurial ventures. One of the biggest problems start-ups face is the legal fees that come along with the desired legal services. Most start-ups have very limited resources, which they intend to direct to their development costs; legal fees are often considered to be a burden.

In this spirit, many young entrepreneurs do not avail themselves of law firms, and instead try to move forward using online sources or without obtaining any legal support at all. This can cause significant problems later in the life of the business; small problems when disregarded at the beginning risk turning into major legal issues.

To help entrepreneurs avoid such problems and build a strong formal foundation for their new ventures, and in keeping with ICC’s mission to facilitate international trade, ICC has prepared this package of six model documents that address key issues related to the formation of a corporate entity. The ICC Model Contracts for Start-ups¹ have been drafted by practicing international experts for new businesses that intend to operate internationally. The models have therefore been drafted without reference to any particular national law, but rather to internationally-accepted standards of international business-to-business practice, with the option for parties to choose an applicable national law.

Fundraising process

During the event, Nikhilesh Goel (Co-Founder & Group CEO, Validus, Singapore) first shared five fundraising learnings from a start-up entrepreneur.

1. Understanding the Venture Capital (VC) math is key to finding the right ‘Investor Fit’. VC investors look for the rare deal that will yield very high returns. If your deal is more modest, VC funding may not be appropriate.
2. Choosing the right investor partner is key to long-term success. There are a range of possible investors who provide, and expect, different things, including Angel investors; Corporate VC investors; Family Office/Passive investors; and classic VC/Accelerator investors.
3. The fundraising process can be long. Stages include an initial ‘teaser proposal’ and if that sparks interest, usually include an NDA/confidentiality agreement; an information memo; a term sheet; a careful due diligence process; and finally, negotiation and drafting of final deal documents.
4. The Shareholders Agreement is most important document as it sets out the heart of the business arrangement. Make sure to know your worth; identify your non-negotiable terms; keep as much control of the company as you can; and fully understand the deal documents yourself before signing.
5. ICC Model Contracts would have been very useful benchmarks when seeking funding. Future entrepreneurs will have the benefit of the sound baseline provided by the ICC models.

ICC Model Confidentiality Agreement – Protecting your valuable information

Bettina Geisseler (Lawyer, Geisseler Law, Germany) noted the Confidentiality Agreement memorializes agreement of entrepreneur and potential partner/investor that entrepreneur’s unique know-how is commercially valuable and must be protected. It should be signed at beginning of discussions about a commercial activity, to establish the ground-rules.

Ms Geisseler highlighted core elements including:

• Definition of confidential information. Don’t be too general, give specifics.
• Obligation not to disclose. Purposes for which receiver may use information, e.g. only related to the instant acquisition/distribution/etc. Receiver should protect information with same degree of care it would use to protect its own proprietary information.
• General exceptions include information already publicly known or received before signing the agreement, or disclosures to ‘permitted recipients’ e.g. lawyers or financial advisors (already bound by regulatory confidentiality obligations).
• Remedies for breach. Consider liquidated damages so aggrieved party need prove only the occurrence of breach, not its valuation.
• Duration. Ideally specify a period, e.g. ten years from signing confidentiality agreement or five years after deal closes.

ICC Model Term Sheet – Agreeing to shared key principles

Carlo Tabellini (Managing Partner, Studio Tabellini, Italy) then explained what a term sheet is.

• A summary of key points on which parties have reached a shared vision and agreement to negotiate.
• ICC Model Term Sheet is non-binding except for a few clauses, including exclusivity, jurisdiction, and applicable law. Although not binding, parties must continue to negotiate in good faith.
• Why sign a term sheet? A term sheet is useful in complex negotiations where things develop in steps, each one with cost implications. Due diligence and contract negotiation/drafting are expensive and time-consuming. Fixing agreed key points allows parties to spend less time/money.
• When to sign? With or just after the confidentiality agreement - as soon as parties find their interests converge. As with all ICC Model Contracts, before signing, seek legal advice to ensure any adjustments are made to comply with applicable law and regulations.

ICC Model Shareholders Agreement – Regulating relations among entrepreneurs and shareholders

Ercüment Erdem (Founder and Senior Partner, Erdem & Erdem, Turkey; Chair of ICC Commercial Law and Practice Commission; Chair of the ICC Working Group of the ICC Model Contracts for Start-Ups) highlighted the purpose of a shareholders agreement (‘SHA’), why start-ups need an SHA, and set forth the main features of the ICC Model SHA.

An SHA sets terms of binding relationship between entrepreneurs and shareholders. It can be signed early among founders, or later, with investors. Most countries don’t specifically regulate by law, but may impose registration/form requirements. The SHA is independent from the company’s articles of association. Some SHA provisions may be reflected in articles of association, which are often annexed to the SHA.

Start-ups need an SHA as it sets rules/obligations for an otherwise unknown future. It is important to put the SHA in place at beginning of a venture to align plans on future company growth and avoid misunderstandings and inefficient, long-lasting debates. It also acts as a buffer among shareholders: if problems/disputes arise, their resolution is quicker because there’s already an agreement on foreseen issues, e.g. investor exit.

The ICC Model SHA is balanced to protect all parties’ interests and comprehensive, including details regarding investment, governance, voting rights, etc. as well as optional clauses to allow tailoring to particular transactions. One should read the footnotes and guidance carefully, and – as with all (ICC) model contracts – before signing, seek legal advice to ensure any adjustments are made to comply with applicable law and regulations.

Q&A session

Which legal authority addresses confidentiality violations?

Courts in the state given jurisdiction under the confidentiality agreement. If the agreement is silent, likely the state court in the violating party’s country. Always consider seeking immediate injunction in state court if the violating party is disseminating the protected information.

Consider ICC Arbitration because of arbitrators’ expertise and possibility of lower costs.

What’s the biggest risk an entrepreneur might face without legal counsel or model contracts?

Losing control of the business or entering a legal dispute that can end company’s viability. For example, imagine a contract under which raising any future money requires original investor’s agreement. An unscrupulous investor might drive the company into the ground by refusing subsequent investments, then cherry-pick the assets of the crippled company.

What’s the best exit mechanism for an investor?

Exit mechanisms are set out in the term sheet and detailed in the SHA. The ICC Model Term Sheet provides five exit options: (i) right of first refusal; (ii) right to co-sell (tag-along) - favors minority shareholders by giving them right to sell when majority shareholders want to sell, (iii) obligation to co-sell (drag-along) - favors majority shareholders, who can force minority to sell; (iv) call option; and (v) put option.

Any advice when going into business with friends or family?

A very personal decision, underscoring the importance of getting a proper SHA in place. If the start-up does not work out, it is good to have written options for disengagement to help salvage the underlying personal relationships.

Organising your company

Cecilia Xu Lindsey

Arbitrator, Barrister, 9 Stone Buildings Barristers Chambers, London

The second SME LAB in this series focused on issues of organising companies, such as managing relations with your company directors, employees and protecting Intellectual property rights.

Souleymane Gning (Founder and CEO, Assuraf, Senegal) shared his experience as CEO of start-up companies and highlighted the importance of having the right contractual framework for start-up companies. Staff are the main resource of start-up companies. Many start-up companies lack funding and have no legal advice or flexibility for employment framework and suffer from inadequate intellectual property protection. In Senegal, there are four types of employment contracts, any other type of employment which is not compliant with any of these four is regarded as unlawful. Thanks to the work of the local Chamber of Commerce, more businesses begin to use and adapt contract templates, but start-up companies may face stringent legal requirements in certain jurisdictions (such as in Senegal) and may also be unfamiliar with the benefit of model contracts. Lack of legal advice, deficiency of employment agreements, inadequate IP guidance, weak practice and unlawful conduct expose start-up companies to legal risks. These issues affect growth, competency and continuity of the venture.

ICC Model Directors Services/Management Agreement

Sergi Gimenez (Partner, Augusta Abogados, Spain; Member of the ICC Working Group of the ICC Model Contracts for Start-Ups) pointed out that the polls showed that a great number of attendants joined this seminar for the unique ICC Model Contracts. He observed the diverse background of the panel speakers and the Working Group members. ICC Model Contracts reflect the respective sensitivities and legal cultures, having adopted a balanced approach, and offer a useful starting point for start-up companies. Start-ups seek expertise, whereas investors may wish to retain control. It is therefore essential to set out clear terms for the parties’ relationship.

Mr Gimenez explained that one of the key questions relating to directors services is to define the scope of the service. The director will contribute his or her expertise; but this must be tailored to the needs of the company, for instance, the level of the director’s authority and remuneration.

Other concerns such as working time, non-competition, confidentiality, and conflict of interests are addressed in this Agreement, without favoring any specific party. Differences between the positions of shareholders and directors, though these two roles may be held by the same individual, also demand clear definition in the parties’ agreement.

ICC Model Employment Agreement

Cecilia Xu Lindsey (Arbitrator, Barrister, 9 Stone Buildings Barristers Chambers, UK; Member of the ICC Working Group of the ICC Model Contracts for Start-Ups) noted that ICC Model Contracts are necessary for start-up companies to ensure security of capital, investment and growth. The ICC Model Employment Agreement deals with a range of relevant issues, providing guidance on crucial terms, which will help start-up companies save costs and reduce risks, including litigation risk. For international lawyers, these are great source of reference. Employment issues are often regulated heavily at the national level, and an employment agreement must first comply with laws of the country in which it resides. A well drafted employment agreement provides clarity and certainty and eliminates many potential issues of dispute.

ICC Checklist on IP Assignment and Licensing

Ecem Süsoy (Senior Associate, Erdem & Erdem, Turkey; Member of the ICC Working Group of the ICC Model Contracts for Start-Ups) discussed IP rights and presented the ICC IP Guidance Document. IP is often one of the most valuable assets in aa start-up’s portfolio, so it is vital that entrepreneurs protect these rights (i.e. trademark, patent, copy right and industrial design) as early as possible. Commercial negotiations on IP rights should be informed by dedicated expert legal support. Given the wide range of possible IP-related scenarios for new companies, the ICC Working Group decided to draft a checklist of IP issues to consider, which gives flexibility regardless of the types of IP, transaction, industry and jurisdiction. Ms Süsoy explains that the IP Checklist covers major issues as good guidance for users and that when drafting an agreement of assignment or licence, users are strongly advised to consult legal counsel.

As a final note, Ecüment Erdem mentioned that ICC Model Contracts are drafted with international legal principles in mind. Mr Erdem also noted that the ICC Anti-Corruption Clause also reflects best practice in international corporate transactions.² He then referred to boilerplate clauses (i.e. good faith and fair dealing, confidentiality, dispute resolution, applicable law …) that are used to ensure consistency throughout the ICC Model Contracts. When choosing a national law as applicable law, users are recommended to choose what they are familiar with. In respect of dispute resolution, the Model Contracts provide that ‘the Parties may at any time … seek to settle any dispute arising out of or in connection with the present agreement in accordance with the ICC Mediation Rules’. The 2021 Model Contracts also provide for ICC Arbitration (Option A) or litigation before ordinary courts (Option B).

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