From companies at the Seed stage to Global Corporates, financial agreements play a pivotal role in shaping the rights and obligations companies have in relation to their investors and creditors. One such aspect that impacts companies once they reach the profitable, cash generative and investment grade corporate stage in their lifecycle is the inclusion of "Information Undertakings" in debt financing documentation, which serve to offer creditors insight into the financial health of their debtors and ensuring accountability. Similarly, startups face similar obligations when raising capital from VC funds.
Understanding Information Undertakings in Debt Financing
What are Information Undertakings?
Information undertakings are clauses embedded in debt financing agreements that legally bind borrowing parties to furnish essential financial data to lending entities. Typically found in the documentation of companies once they become large and profitable, these clauses necessitate the regular submission of management accounts and covenant compliance certificates. The periodicity aligns with the company's reporting frequency, usually semi-annual or quarterly.
Why are they Crucial?
For lenders, access to timely and accurate financial information is paramount for assessing risk and making informed decisions. The transparency offered by information undertakings enables lenders to monitor the financial health of the borrowing party and ensure compliance with agreed-upon covenants. This proactive approach safeguards the interests of both parties involved in the financial arrangement.
Investor Oversight in Equity Agreements
VC Funds and Share Purchase Agreements: A Symbiotic Relationship
For startups securing equity investments from Venture Capital (VC) funds, the oversight takes a different form. Share Purchase Agreements (SPAs) become the focal point, with VC funds introducing clauses that dictate the provision of annual budgets and the necessity for investor approval for expenditures outside the agreed budget.
Annual Budgets: A Blueprint for Financial Management
VC funds seek to mitigate risks by requiring startups to present annual budgets. These financial roadmaps outline revenue projections, anticipated expenses, and growth strategies. This allows investors to align expectations, track performance, and actively contribute to strategic decision-making.
Investor Approval: Balancing Autonomy and Accountability
The requirement for investor approval on significant expenditures beyond the budget ensures a collaborative and mutually beneficial partnership. Investors gain a level of control over the financial direction of the startup, promoting transparency, and protecting their investment. Startups, in turn, benefit from the experience and strategic insights of their investors.
Q&A Section
What is a VC Fund?
A Venture Capital (VC) fund is a pooled investment vehicle managed by professional fund managers, primarily investing in startups and small- to medium-sized enterprises (SMEs) with high growth potential.
What is a Budget?
A budget is a financial plan outlining anticipated revenues and expenditures for a specific period. It serves as a roadmap for financial management, providing a basis for decision-making and performance evaluation.
What is a Capital Expenditure?
Capital expenditure (CapEx) is the spending by a company on acquiring or upgrading physical assets, such as property, equipment, or infrastructure, with the aim of generating future benefits.
What are Operating Expenses?
Operating expenses (OpEx) are the ongoing costs of running a business, including rent, utilities, wages, and other day-to-day expenses necessary for business operations.
In the intricate dance of finance and business growth, understanding these terms and contractual nuances is paramount. Whether through debt financing documentation or equity agreements, these financial instruments serve as the compass guiding companies through their distinct phases of evolution.
Enquiries
For further information, please contact info@langdoncap.com
About Langdon Capital
Langdon Capital assists innovative, high-growth companies, with >£1m in annual revenue and >20% in annual revenue growth, raise between £1m and £25m in debt or equity at Series A or beyond from a network of 700+ alternative investors spanning venture capital funds, venture debt funds, corporate VC arms, private credit funds, real estate funds and family offices.
contact info@langdoncap.com | visit www.langdoncap.com/capital-raising
About the author
Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.
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This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.
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