Introduction to Private Equity and Venture Capital

1
Introduction toPrivate Equity and Venture
Capital
2
Content

• Definition of Private Equity
• Fund Structure
• MBO Structure
• Process of typical Private Equity transaction
• Issues of parties concerned
• Legal Documentation
• Key provisions in Shareholder Agreements

3
Definition

• Private Equity provides equity capital to
  enterprises not quoted on a stock market. Private
  equity can be used to develop new products and
  technologies, to expand working capital, to make
  acquisitions, or to strengthen a companys
  balance sheet. It can also resolve ownership and
  management issues. A succession in family-owned
  companies, or the buyout and buy-in of a business
  by experienced managers may be achieved using
  private equity funding.
• Venture capital is, strictly speaking, a subset
  of private equity and refers to equity
  investments made for the launch, early
  development, or expansion of a business.

4
Fund Structure
Private Equity Fund Structure
Monies Services
Individual Investors
InstitutionalInvestors
Trusts, Foundations, etc.
Share by managers
Private-Equity-Fund
Management-Company
Portfolio company A
Portfolio company B
Portfolio company C
5
Fund Structures

• Limited partners individual and institutional
  investors and pension funds contributing to the
  funds capital and committing to provide capital
  and loans to the fund once suitable investment
  opportunities have been identified by the general
  partner, receiving, in return, a hurdle rate on
  their funds and sharing profits in excess of this
  return with carry holders
• General partner commonly a limited liability
  entity formed by the funds executives and / or
  sponsors, who is ultimately responsible for the
  funds management and carries out the day-to-day
  management of the funds, receiving, as
  remuneration, a management fee from the fund.
• Executives and sponsors (carry holders)
  generally these are partners to or executives of
  the private equity firm acting as general partner
  and also employees or directors of the general
  partner or associated company (ie the fund
  management company). These executives commonly
  contribute capital to the fund either directly or
  through a carry vehicle and usually participate
  in carried interest.
• Managers and advisers most funds ( or their
  general partners) retain a manager or investment
  adviser (or both) to manage the funds
  investments and / or to advise the fund in its
  investment strategy (ie evaluating investment and
  exit opportunities).

6
Typical Fund Structures Austria

• Mittelstandsfinanzierungsgesellschaft ( 6b
  KÖStG)
• The dominant PE fund form was the so called
  Mittelstandsfinanzierungsgesellschaft (MFAG).
  MFAG is a benefit from an exemption from a
  corporate tax an on income realized from
  portfolio investments in medium and small sized
  companies.
• MFAG tax regime did not meet international
  standard
• banks need to be founders,
• 30 of investments need to be commercial
  (gewerbliche Businesses),
• investments in Austrian, small or medium sized
  companies,
• 75 of investments in Austrian companies.
• MFAG found to be non-compliant with EU-law.
• A new MFAG proposal has been enacted, which is
  still very cumbersome but no longer requires 75
  of investments occur in Austrian small and medium
  sized companies.
• Introduction of a new private equity law
  (IGG-Investment-gesellschaftengesetz) is
  currently being discussed. The proposal,
  supported by the Austrian Venture Capital
  Organisation AVCO, is to replace the current tax
  regime with an improved fund structure in the
  form of a tax transparent partnership which also
  benefits from an exemption from corporation and
  income realized by portfolio companies.

7
Procedure of typical Private Equity Venture
Capital financings

• Investment story
• Preparation of the business plan
• Company evaluation ? 8 months
• Presentations of the management
• Term Sheet
• Due Diligence ? 4 months
• Shareholder Agreement
• Closing

8
Main Drivers of the parties concerned

• Founders/Management
• Loss of Management Control
• Dilution of investments
• Adequate and sufficient financing of the company
• Future financing requirements of the company
• Indirect advantages due to involvement of private
  equity, such as access to key contact persons of
  the industry concerned assistance for further
  financing rounds and exit

9
Main Drivers of the parties concerned

• Private Equity-Investors
• Current and future company evaluation
• Investment risks
• Purpose of the investment fund and investment
  criteria
• Projected return on investment
• Liquidity of the investment
• Securities in case of an unfavorable development
  or a total loss (Downside Protection)
• Possibilities to participate in further financing
  rounds, if milestones have been met or surpassed
  (Upside Protection)
• Influencing and supervising strategic decisions
  of the management
• Control and timing of further financing rounds
• Determining the time of exit

10
Main Drivers of the parties concerned

• Mutual concerns
• Long-term commitment of the management filling
  vacancies in the current management
• Preventing and resolving conflicts within the
  PE-syndicate
• Financial strength of the company following the
  investment
• Fiscal consequences of the investment

11
Buy-out Structure
TYPICAL BUY-OUT STRUCTURE
PE Fund
Management
4,8 million
0,2 million
10 million
Bankers
Vendor
Newco
6 million
100 per cent
100 per cent
Service Debt
Target company
Mezzanine Debt
12
Forms of Buy-out
Form of Buy-out
Initiator
Acquiror
Scope
Spin-off
MBO (internal Management)
IBO (PE-Investor)
PAMBO (lt 100 of share)
VIMBO (Vendor)
MBI (external Management)
SEMBO (sale by PE-Investors)
BIMBO (MBO MBI)
EBO (Employees)
OBO (equity shareholders)
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Structuring issues

• Tax structure
• Tax transparency each investor should be treated
  in its home jurisdiction as receiving evidence,
  interest and capital gains as if it were the
  direct honour of their leaving shares in the
  portfolio company
• Deductibility of interest in connection with the
  acquisition debt
• Tax-effective use of good-will of the target
  company (depreciation good-will)
• Tax-effective use of tax loss a carry forwards of
  the target with profits of the acquisition
  vehicle.
• Tax Treatment of Carried Interest
• Corporate Structuring issues
• Debt push down issues Financing a bank will
  usually seek to ensure that
• the available liquidity (the profits) are used to
  repay the acquisition debt and
• the assets of the company are provided as
  security for the acquisition debt. Both goals are
  difficult to implement due to the capital
  maintenance/financial assitance limitations and
  requirements pursuing to section 82 GmbH
  (sections 52, 66a Aktiengesetz)
• Liability Issues
• - Representatives and warranties
• - Assumption of liabilities ( 1409 ABGB, 38
  UGB, 15 SpaltG etc.).

14
Legal Documentation

• Main Documentation
• Term Sheet
• Subscription Agreement
• Shareholder Agreement
• Financing Documentation
• Other Documentation
• Articles of association
• Sub-shareholder agreements between the
  PE-Investors
• Agreements with senior management
• Employee / Management Stock Option Plan
• Agreements on the transfer of intellectual
  property rights
• Support agreements for management support

15
Documentation

• Term Sheet
• Legal nature generally not binding intends to
  merely prepare the parties to enter into a
  binding agreement
• Provisions on confidentiality, exclusivity, non
  solicitation, choice of law and jurisdiction are
  typically binding
• Purpose
• Indicate commitment for further detailed of
  negotiations, in particular in case of binding
  confidentiality and exclusivity provisions break
  fee
• Record of the results of the negotiations as well
  as road map for further proceedings
• Framework for distributing legal and economic
  risks of the contracting parties

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Acquisition/Subscription Agreement

• Subscription Agreement
• Agreement to sell and purchase or subscribe
  shares
• Legal nature Binding agreement which complies
  with all form requirements
• Key provisions
• Conditions precedent (regulatory approvals, stock
  exchange requirements, third party consents)
• Termination rights
• Closing
• Purchase price (including purchase price
  adjustment, mechanism debt free/cash free
  purchase price)
• Closing balance sheets/accounts
• representations and warranties/indemnities
  (including provisions on awareness of seller,
  awareness of a purchase, financial limits on
  warranty claims, time limits on warranty claims,
  joint net several liability)
• Separate warranties/indemnities and consequences
  of breach
• Manager
• Company
• Vendor
• Restrictive covenants, undertaking not to compete
• Disclosure letter

17
Shareholder Agreement

• Shareholders Agreement
• Legal nature Binding agreement which complies
  with all form requirements
• Purpose Intends to comprehensively regulate
  future cooperation.
• Typical content of the provisions Precise
  wording of the principles established in the
  Term-Sheet, deviations usually as a result of the
  due diligence
• Additional provisions
• Guideline for employee and management stock
  option plan
• Non-compete obligations
• Contribution of patents/intellectual property
  rights
• Consultancy agreement with PE for management
  support

18
Shareholder Agreement Typical Provisions

• Typical Provisions
• Preferred Shares
• Preferred dividends provides for fixed interest
  on the capital to the PE-investor, usually
  combined with
• liquidation preference prior to all other common
  shareholders pursuant to which at an exit event
  the PE-investor will receive the amount he would
  have earned if the dividend had been paid-on over
  the life of the investments.

19
Liquidation Preference

• Example Liquidation Preference
• Liquidation Event
• For the purposes of this Agreement, each of the
  following events shall be deemed a "Liquidation
  Event"
• the sale or other disposal of all or at least
  50 of the assets of the Company and subsequent
  decision to distribute the proceeds of such sale
  or disposal to the Shareholders
• a sale or other disposal of at least 50 of the
  shares in the Company
• a merger of the Company with any third party
  and
• a consolidation, liquidation, winding up or any
  other form of dissolution of Company.

20
Liquidation Preference

• Such events shall however only be deemed a
  Liquidation Event if
• effected prior to a Qualified Public Offering.
• Liquidation Preference
• Upon a Liquidation Event the proceeds of such
  Liquidation Event shall be distributed as
  follows
• Each holder of Series A Preferred Shares, Series
  B Preferred Shares or Series C Preferred Shares
  shall be entitled, with respect to its Series A
  Preferred Shares, Series B Preferred Shares and
  Series C Preferred Shares, as applicable, (but,
  for the avoidance of doubt, not with respect to
  any other Shares held by such Shareholder) to
  elect between (i) participation in the
  distribution of the proceeds pro rata to its
  holding of Series A Preferred Shares, Series B
  Preferred Shares or Series C Preferred Shares, as
  applicable, or (ii) receiving a liquidation
  preference as follows

21
Liquidation Preference

• Subject to the provisions relating to Series C
  Minus Shares in Section 3.3 and in Section 4.4.2,
  each holder of Series C Preferred Shares shall be
  entitled to elect to receive, in preference to
  the other Shareholders (excluding those holders
  of Series C Preferred Shares who elect to receive
  the same liquidation preference) and to the
  extent proceeds are available for distribution,
  an amount equal to the Series C Purchase Price
  applicable at the date of the Liquidation Event
  (i.e. subject to any adjustment pursuant to
  Section 3.3, as the case may be) multiplied by
  the number of Series C Preferred Shares held by
  the respective Investor at the date of the
  Liquidation Event (the "Liquidation Preference")
  plus an interest of 15 p.a. for the period of
  time beginning with the Effective Date (payable
  upon distribution of the liquidation proceeds in
  the course of a Liquidation Event) (the
  "Preferred Interest" the Liquidation Preference
  and the Preferred Interest together the "Series C
  Liquidation Preference Amount") provided,
  however, that the Series C Liquidation Preference
  Amount shall not exceed 150 of the total amount
  actually invested by the relevant holder of
  Series C Preferred Shares as part of the
  subscription of the Series C Preferred Shares
  (whether in the form of nominal share capital or
  shareholder contributions) (the "Liquidation
  Preference Cap").

22
Liquidation Preference

• If the holders of Series C Preferred Shares have
  elected to receive a liquidation preference as
  per paragraph (a) above, each holder of Series B
  Preferred Shares shall be entitled to elect to
  receive, in preference to the other Shareholders
  (excluding those holders of Series B Preferred
  Shares who elect to receive the same liquidation
  preference) and to the extent proceeds are
  available for distribution, an amount equal to
  the Series B Purchase Price applicable at the
  date of the Liquidation Preference multiplied by
  the number of Series B Preferred Shares held by
  the respective holder of Series B Preferred
  Shares.
• If the holders of Series C Preferred Shares and
  Series B Preferred Shares have elected to receive
  a liquidation preference as per paragraph (b)
  above, each holder of Series A Preferred Shares
  shall be entitled to elect to receive, in
  preference to the other Shareholders (excluding
  those holders of Series A Preferred Shares who
  elect to receive the same liquidation preference)
  and to the extent proceeds are available for
  distribution, an amount equal to the Series A
  Purchase Price applicable at the date of the
  Liquidation Preference multiplied by the number
  of Series A Preferred Shares held by the
  respective holder of Series A Preferred Shares.
• The remainder of the proceeds shall be
  distributed amongst all Shareholders who have
  elected not to receive, or who are not entitled
  to receive, a liquidation preference according to
  this Section 4.3.2 (a) through (c) above, pro
  rata to their shareholdings in the Company.

23
Liquidation Preference

• For the avoidance of doubt, a Shareholder who has
  elected to receive a liquidation preference
  according to this Section 4.3.2 (a) through (c)
  above shall, to the extent that such liquidation
  preference has actually been received by such
  Shareholder, not participate in the pro rata
  distribution of the remainder of the proceeds.
• The elections above shall be made within ninety
  (90) days from the occurrence of the Liquidation
  Event and shall be communicated by each Party
  entitled to such election to the Company in
  writing (with a copy to the other Shareholders).
  In case of a Party's failure to timely
  communicate its election to the Company, such
  Party shall be deemed to have elected the option
  which results in a higher absolute payment to
  such Party.

24
Shareholder Agreement Typical Provisions

• Redemption-Rights right of the PE-investor to
  sell shares back to the company or to the founder
  at a minimum price. Usually not practical in case
  the required reserves do not exist or additional
  cash is necessary to reach the milestones set
  forth in the business plan.
• Approval/Pre-emption right sale of shares the
  third parties require the approval of the
  PE-investor (typically a majority of ¾) and are
  mostly connected to pre-emptive rights which
  allow the PE to influence the future shareholder
  structure.

25
Preemption Right/Right of First Refusal

• Example 1 Preemption Right/Right of First
  Refusal
• Procedure
• If, at any time prior to a Qualified Public
  Offering, a Shareholder or a group of
  Shareholders wishes to sell or otherwise transfer
  (such Shareholder for the purposes of such
  transaction hereinafter being referred to as
  "Seller") any of its Shares to another
  Shareholder or a third party ("Proposed
  Purchaser") other than under a Permitted Transfer
  pursuant to Section 5.2 (b) through (k), such
  Transfer ("Sale") shall be made pursuant to the
  following procedures

26
Preemption Right/Right of First Refusal

• The Seller shall deliver a written notice ("Offer
  Notice") to the Company which shall immediately
  forward a copy thereof to all other Shareholders.
  The Offer Notice shall disclose in reasonable
  detail the Proposed Purchaser, the proposed
  Shares to be sold ("Shares To Be Sold") and the
  proposed terms and conditions (including the
  proposed bona fide price).
• The other Shareholders shall, pro rata to their
  shareholding as opposed to the joint shareholding
  of all other Shareholders, be entitled to
  purchase all (but not less than all) of the
  respective pro rata portion of the Shares To Be
  Sold specified in the Offer Notice at the price
  and on the terms specified therein by delivering
  written notice of such election ("Election
  Notice") to the Seller within 30 (thirty)
  Business Days after delivery of the Offer Notice.
  If not all other Shareholders elect to purchase
  their respective pro rata portion of the Shares
  To Be Sold in an Election Notice, the Seller
  shall re-offer such portion of the Shares To Be
  Sold for which the Right of First Refusal has not
  been exercised to such Shareholders that have
  exercised their Right of First Refusal with
  respect to their respective pro rata portion of
  the Shares To Be Sold. For this portion of the
  Shares To Be Sold, the procedure set out in this
  sub-section (b) shall be re-applied, whereby
  (i) the Election Notice shall be delivered within
  10 (ten) Business Days after delivery of the new
  Offer Notice and (ii) the refusal of a
  Shareholder to exercise his Right of First
  Refusal for such additional portion of the Shares
  To Be Sold results also in a refusal of the
  entire Right of First Refusal with respect to
  such Sale, including with respect to the portion
  of the Shares To Be Sold in the first offer
  round. This procedure shall be repeated until the
  Right of First Refusal has either been triggered
  for the entire Shares To Be Sold or not.

27
Preemption Right/Right of First Refusal

• In case (at least one of) the other Shareholders
  has elected to purchase the Shares To Be Sold
  pursuant to the final Election Notice, the
  transfer of the Shares To Be Sold shall be
  consummated as soon as practicable after the
  timely delivery of the final Election Notice, but
  in any event within 14 (fourteen) days after such
  delivery.
• In the event that none of the other Shareholders
  elects to purchase the Shares To Be Sold pursuant
  to the Election Notice and provided that the
  approval according to Section 5.1(o) has been
  granted, the Seller may, within 30 (thirty) days
  after delivery of the final Election Notice sell
  such Shares To Be Sold to the Proposed Purchaser
  at a price no more favourable than the price
  specified in the Offer Notice and on terms no
  more favourable to the Proposed Purchaser than
  specified in the Offer Notice, provided, that in
  the case the Proposed Purchaser is a third party,
  the Proposed Purchaser accedes to this Agreement
  pursuant to the procedure set out in the final
  paragraph. Any Shares To Be Sold not sold within
  such 30-day period shall be re-offered to the
  other Shareholders pursuant to this Section ?
  prior to any subsequent sale.

28
Preemption Right/Right of First Refusal

• Purchase Price in Special Cases
• If the Sale of Shares occurs (in full or in part)
  for other consideration than cash, the Parties
  agree that the price for the respective Share To
  Be Sold shall be the market value of such
  consideration. In the event of a share swap in
  connection with a listed company the
  consideration corresponds to the share price of
  such company on the day of the mailing of the
  first Offer Notice according to section ?(a). In
  the event the market value cannot be determined
  or the Seller or the majority vote of the other
  Shareholders with the consent of the Lead
  Investor (unless the Lead Investor itself is the
  Seller) do not agree on a value for such
  consideration, then the market value shall be
  determined by an independent auditor in
  accordance with the Rules and Guidelines of the
  Special Committee for Business Management and
  Organization of the Institute for Business
  Management, Tax Law and Organization of the
  Chamber of Certified Public Accountants for the
  Valuation of Enterprises KFS BW1 ("Fachgutachten
  (KFS BW1) des Fachsenats für Betriebswirtschaft
  und Organisation des Instituts für
  Betriebswirtschaft, Steuerrecht und Organisation
  der Kammer der Wirtschaftstreuhänder über die
  Unternehmensbewertung" hereinafter "KFS BW1") as
  may be valid from time to time or in accordance
  with any appropriate substitute rules and
  guidelines commencing within 14 (fourteen) days
  after delivery of the Offer Notice. If the Seller
  and the majority vote of the other Shareholders
  with the consent of the Lead Investor (unless the
  Lead Investor itself is the Seller) do not agree
  on the appointment of such independent auditor
  within another period of 14 (fourteen) days, each
  Party shall individually be entitled to ask the
  president of the Austrian Chamber of Accountants
  (Präsident der Kammer der Wirtschaftstreuhänder
  Österreichs) to elect an independent auditor with
  binding effect for all parties. The valuation of
  such independent auditor shall be binding for the
  Seller and the other Shareholders. The costs of
  such independent auditor shall be borne by the
  Seller and the other Shareholders equally,
  whereby the other Shareholders amongst themselves
  bear such costs on a pro rata basis.

29
Preemption Right/Right of First Refusal

• Obligatory Transfer Event
• Subject to the last paragraph of this Section ?,
  the Right of First Refusal shall also apply in
  case
• of any enforcement proceedings into Shares or a
  commencement of insolvency proceedings of
  whatever sort, not withdrawn or repealed within
  30 (thirty) days for other cause than
  insufficient assets, in each case of any
  Shareholder or
• a Shareholder is obliged, for whatever reason
  other than pursuant to this Agreement, to dispose
  of its shares to a Person that is not an
  Affiliate of such Shareholder, including without
  limitation in case of a divorce of the marriage
  of such Shareholder.
• In such cases an Offer Notice shall be deemed to
  have been delivered by the respective Shareholder
  after Expiry of the respective remedy period.
  With respect to the Purchase Price applicable in
  such scenario, Section ? applies

30
Pre-emptive Rights

• Example 2 Pre-emptive Rights
• Each Shareholder shall have the right to maintain
  its percentage ownership in the Company
  (calculated on an as-converted basis) by
  purchasing a pro rata portion of any further
  issuance of securities (i.e., shares or other
  securities convertible into shares) by the
  Company on the same terms as such securities are
  offered to the other purchasers. This pre-emptive
  right shall not apply during (i) a Qualified
  Public Offering, (ii) any share capital increase
  to the extent required to serve stock options or
  employee participation plans pursuant to any
  future stock option or employee participation
  plans approved by the Board of Directors, and
  (iii) any share capital increase to the extent
  required to service any adjustments to the Series
  A purchase price in accordance with the
  anti-dilution provisions.

31
Shareholder Agreement

• Antidilution in case of a decrease in the value
  of the company in future financing rounds, the
  PE-investor will be treated as if he had
  purchased the share at a lower price in later
  rounds (Full-Ratchet-Provision). Antidilution can
  be achieved by Weighted-Average provisions (in
  addition to the price in later financing rounds,
  the amount of newly purchased shares in relation
  to the total amount of shares to be purchased
  will be accounted for. Provision does not make
  sense, if the quota of the founders decreases
  excessively in the down-rounds.

32
Shareholder Agreement

• Example Full Ratchet Anti-dilution Provision
• In the event of any issuance by the Company of
  new Shares, warrants, share equivalents or
  convertible securities of whatever nature or
  rights to purchase Shares, warrants, share
  equivalents or convertible securities of whatever
  nature, except for issuance of (i) new shares
  pursuant to any future stock option or employee
  participation plans (approved by the Board of
  Directors) or (ii) in the course of an initial
  public offering, for consideration less than the
  Series A purchase price ("Anti-Dilution Event"),
  the holders of Series A preferred shares shall,
  in addition to their statutory subscription
  right, be entitled to subscribe for such number
  of additional Series A preferred shares (the "New
  Anti-Dilution Shares") to be calculated on the
  following full ratchet formula

33
Shareholder Agreement

• New Anti-Dilution Shares (IA / NSP) - NAS
• In this formula the following expressions shall
  have the following meanings
• NSP shall mean the new share price per share in
  EUR paid under the Anti-Dilution Event (the "New
  Share Price").
• NAS shall mean the number of Series A preferred
  shares subscribed by the holders of the Series A
  preferred shares prior to an Anti-Dilution Event.
• IA shall mean the the total investment amount
  of the holders of Series A preferred shares prior
  to the Anti-Dilution Event.
• The New Share Price shall be subject to
  proportional adjustments for stock splits, stock
  dividends, recapitalizations or similar corporate
  events, if any.

34
Shareholder Agreement

• Any such New Anti-Dilution Shares shall be
  created, to the extent possible, by issuing new
  Series A preferred shares according to the
  Austrian Act of Capital Adjustment
  (Kapitalberichtigungsgesetz) or otherwise by
  issuing new Series A preferred shares by way of
  an ordinary share capital increase against
  payment of EUR 1 (Euro one) for each new Series A
  preferred share. The parties agree to vote in
  favor of any such share capital increase, whether
  pursuant to the Austrian Act of Capital
  Adjustment or by way of an ordinary share capital
  increase, and to waive their subscription right,
  to the extent they are not permitted pursuant to
  this Agreement to subscribe for such new Series A
  preferred shares.

35
Shareholder Agreement

• Example Weighted Average Adjustment Formula
• If at any time after the original issue date of
  the Series A preferred stock the Corporation
  sells additional shares of common stock, then the
  conversion price for the Series A preferred stock
  shall be reduced to the price obtained by
  multiplying such conversion price by a fraction
• (i) The numerator of which shall be the sum of
  (A) the number of Common Stock Equivalents
  Outstanding (as hereinafter defined) immediately
  prior to such sale of additional shares of common
  stock plus (B) the number obtained by dividing
  the total consideration received by the
  Corporation for all additional shares of common
  stock sold by the conversion price for the Series
  A preferred stock in effect immediately prior to
  such sale and
• (ii) The denominator of which shall be the sum of
  (A) the number of Common Stock Equivalents
  Outstanding immediately prior to such sale plus
  (B) the number of additional shares of common
  stock sold.
• The Common Stock Equivalents Outstanding shall
  mean the number of shares of common stock that is
  equal to the sum of (A) all shares of common
  stock of the Corporation that are outstanding at
  the time in question, plus (B) all shares of
  common stock of the Corporation issuable upon
  conversion of all shares of Series A preferred
  stock or other convertible securities that are
  outstanding at the time in question, plus (C) all
  shares of common stock of the Corporation that
  are issuable upon the exercise of rights or
  options that are outstanding at the time in
  question.

36
Shareholder Agreement

• Pay to Play antidilution is only granted if
  old/current PE-investors participate in a
  down-round in same cases loss of preferred
  share and/or liquidation preference

37
Shareholder Agreement

• Example for Pay to Play
• If in the event of dilutive financing rounds a
  holder of Series A preferred shares does not take
  up its right to subscribe for its pro rata
  entitlement in said dilutive round, then such
  holder of Series A preferred shares shall
  forthwith have no right to any anti-dilutive
  adjustment as a result of the dilutive financing
  round in question or any subsequent dilutive
  financing rounds in respect of those Series A
  preferred shares for which the subscription right
  is not taken up.

38
Shareholder Agreement

• Milestone/Ratchet Provisions Method to adjust
  the initial valuation. In case certain milestone
  are not met, the PE-investor is entitled to
  purchase additional shares (by capital increase
  or by transfer from former shareholders), or in
  the reverse case, the former shareholders are
  entitled to receive additional shares.

39
Milestone/Ratchet Provisions

• Example for Milestone/Ratchet Provisions
• For the purposes of this Agreement, the
  "Milestone" shall be deemed to have been met if,
  no later than 31 December 2009, (i) the Company
  has achieved cumulated Net Revenues in the
  financial years 2008 and 2009 of at least EUR
  3,900,000 and (ii) the Company has obtained
  clearance from the US Food and Drug
  Administration (FDA) under Section 510(k) of the
  United States Food, Drug and Cosmetic Act, to
  market the Company product in the United States
  as a medical device for thermal regulation.
• Adjustment of Series C Purchase Price
• In case the Milestone set forth in Section 3.2 or
  as otherwise agreed upon by the Parties is for
  whatever reason not achieved by the Company by
  31 December 2009 (Milestone Date) at the latest
  (Milestone Violation), the Series C Purchase
  Price shall be reduced to a price per share of
  EUR 27.20 reflecting a reduced pre-money
  valuation of EUR 3,197,632 (Euro three million
  one hundred ninety seven thousand six hundred
  thirty two). In the event of a material change in
  the strategy or business plan of COMPANY agreed
  pursuant to Section 5.2(a) with the consent of
  the Lead Investor Representative, the
  Shareholders shall agree to any corresponding
  changes or amendments to the Milestone required
  as a result of such change.
• In the event the Lead Investor decides, in its
  sole discretion, not to invest the Lead Investor
  Third Tranche due to a Milestone Violation, no
  Shareholder shall receive any additional shares
  in the Company, subject to the following
  sentence. In such case, however, the Series C
  First Closing Subscribers with regard to their
  investment amounts contributed in the Series C
  Financing Round First Closing and the
  Non-Tranching Co-Investors with regard to their
  investment amounts contributed as part of the
  Series C Financing Round, who have paid in the
  entire Series C Purchase Price, shall receive,
  and the Company shall issue to such Series C
  First Closing Subscribers and to such
  Non-Tranching Co-Investors pro rata, additional
  new Series C Preferred Shares as required to
  reflect the reduced valuation as set forth above.
  For the avoidance of doubt any Tranching
  Co-Investor shall be free to contribute a Third
  Tranche also if the Lead Investor decides not to
  invest the Lead Investor Third Tranche due to a
  Milestone Violation, provided, however, that in
  such case such Tranching Co-Investor shall not
  receive any additional Shares.

40
Milestone/Ratchet Provisions

• In case the Lead Investor decides, in its sole
  discretion, to invest the Lead Investor Third
  Tranche into the Company despite of the Milestone
  not having been timely met, (i) the Lead Investor
  with regard to the investment amounts contributed
  as part of the Series C Financing Round Second
  Closing, (ii) the Series C First Closing
  Subscribers with regard to their investment
  amounts contributed in the Series C Financing
  Round First Closing, (iii) the Non-Tranching
  Co-Investors with regard to their investment
  amounts contributed as part of the Series C
  Financing Round Second Closing, and (iv) the
  Tranching Co-Investors who have paid in the
  entire Third Tranche with regard to their
  investment amounts contributed as part of the
  Series C Financing Round Second Closing, shall
  receive, and the Company shall issue to such
  Shareholders pro rata additional new Series C
  Preferred Shares as required to reflect the
  reduced valuation as set forth above (provided,
  however, that the relevant Party referred to in
  (i) through (iv) above has duly paid the entire
  Series C Purchase Price for all Series C
  Preferred Shares issued to it).
• In the event the Lead Investor decides, in its
  sole discretion, to invest the Lead Investor
  Third Tranche, the Tranching Co-Investors shall
  not be obliged to invest their respective Third
  Tranche, provided, however, that in such event
  the following shall apply The Series C Preferred
  Shares subscribed to by such Tranching
  Co-Investor in the Series C Financing Round
  Second Closing shall be automatically converted
  into "Series C Minus Shares". In a Liquidation
  Event (i) these Series C Minus Shares shall not
  entitle their holder to any Preferred Interest
  (as defined below) and (ii) the holders of Series
  C Minus Shares (the "Series C Minus
  Shareholders"), in respect of their Series C
  Minus Shares, shall receive any payments under
  the Liquidation Preference set out in Section
  4.3.2(a) (which, as set forth above, shall not
  include any Preferred Interest) only after the
  Liquidation Preference payable to all holders of
  Series C Preferred Shares in respect of their
  Series C Preferred Shares (other than Series C
  Minus Shares) has been settled in full and to the
  extent proceeds are available for distribution
  after such settlement. The amount of Preferred
  Interest, which would have been payable to the
  Series C Minus Shareholders in respect of their
  Series C Minus Shares had they not been converted
  hereunder into Series C Minus Shares shall be
  paid to the Lead Investor and those Tranching
  Co-Investors who have paid in their entire Third
  Tranche in full (pro rata to their Series C
  Preferred Shares subscribed in the Series C
  Financing Round Second Closing). For the
  avoidance of doubt, the Liquidation Preference as
  set out in Section 4.3.2(a) below (in particular
  the Liquidation Preference Cap) shall not apply
  with respect to any Preferred Interest allocation
  under this Section. For the avoidance of doubt,
  Series C Minus Shares shall be deemed to be
  Series C Preferred Shares for all purposes of
  this Agreement, unless explicitly otherwise
  provided in this paragraph or elsewhere in this
  Agreement. For the avoidance of doubt, in case of
  any discrepancies between (i) the provisions of
  the Articles of Association relating to the
  rights attaching to Series C Preferred Shares and
  (ii) the provisions of this Agreement relating to
  the (reduced) rights attaching to Series C Minus
  Shares, the provisions of this Agreement shall
  prevail.

41
Milestone/Ratchet Provisions

• Any new Series C Preferred Shares to be issued
  pursuant to this Section 3.3 (the "Series C
  Preferred Third Tranche Shares") shall be
  created, to the extent possible, by issuing new
  Series C Preferred Shares according to the
  Austrian Act of Capital Adjustment
  (Kapitalberichtigungsgesetz) or otherwise by
  issuing new Series C Preferred Shares by way of
  an ordinary share capital increase against
  payment of EUR 1 (Euro one) for each new Series C
  Preferred Shares. The Parties agree to vote in
  favor of any such share capital increase, whether
  pursuant to the Austrian Act of Capital
  Adjustment or by way of an ordinary share capital
  increase, and to waive their subscription right,
  to the extent they are not permitted pursuant to
  this Agreement to subscribe such new Series C
  Preferred Shares.
• In the event a decision to proceed with a
  Liquidation Event (Term Sheet signed by Lead
  Investor) or a Qualified Public Offering (binding
  engagement of investment bank) (Exit) has been
  taken prior to the Milestone Date in accordance
  with the terms of this Agreement (i) the
  adjustments set forth in this Section 3.3 shall
  not apply and (ii) the Lead Investor and/or the
  Tranching Co-Investor shall upon such Liquidation
  Event or Qualified Public Offering, as the case
  may be either pay the Lead Investor Third Tranche
  (to be paid by Lead Investor) or the Co-Investor
  Third Tranche (to be paid by the Tranching
  Co-Investors) or put the other Shareholders in a
  position as if the Lead Investor Third Tranche or
  the Co-Investor Third Tranche, as applicable, had
  been paid-in, applies.

42
Shareholder Agreement

• Drag-Along Rights Drag-Along Clauses obligate
  all shareholders to sell their interest, if the
  PE-investors sell their interest and the
  purchaser is willing to purchase a certain
  percentage of the shares of the company (usually
  100 ).

43
Shareholder Agreement

• Example Drag-Along Right
• In the event that, at any time prior to a
  Qualified Public Offering, a majority of the
  holders of Series A preferred shares (the
  "Exiting Seller(s)") voting as a separate class
  intends to accept an offer to acquire their
  entire shares in the Company from (one or more)
  third party(ies), such Exiting Seller(s) shall
  have the right to force all shareholders
  (including for the avoidance of doubt other
  holders of Series A preferred shares) to sell or
  otherwise transfer their entire shares to such
  third party(ies) according to the following
  procedures
• The Exiting Seller(s) shall send a written notice
  to the Company outlining the purchase price and
  the conditions offered by the proposed
  purchaser(s) for the purchase of the shares in
  the Company. The Company shall immediately
  thereafter forward such notice to all other
  shareholders. Within 14 (fourteen) days of the
  receipt of such notice or any later date set
  forth in such notice, all shareholders shall sell
  their entire shares to the respective proposed
  purchaser according to the terms of the
  respective offer. In no event shall the terms of
  the offer to be accepted by the other
  shareholders be less beneficial than the terms
  upon which any of the Exiting Sellers disposes of
  its shares (the Drag-Along Right).

44
Shareholder Agreement

• Tag-Along Rights obligate the PE-investors to
  allow other shareholders to co-sell at equal
  terms as the selling PE-investors.

45
Shareholder Agreement

• Example Tag-Along Right
• In the event that, at any time prior to a
  Qualified Public Offering, a shareholder or a
  group of shareholders (the "Obliged Seller(s)")
  intends to sell or otherwise transfer share(s) or
  parts thereof to a third party or a shareholder
  (such sale being a "Tag-Along Sale"), then the
  Obliged Seller(s) is (are) under the obligation
  to arrange for those other shareholders who wish
  to do so, to be able to sell along, transfer
  and/or swap the shares of such shareholders on a
  pro rata basis on the same economical terms
  agreed between the Obliged Seller(s) and the
  respective purchaser(s). Pro rata means that all
  other shareholders who wish to participate in
  such Tag-Along Sale may do so in proportion to
  their respective shareholding in all of the
  shares of the Company and to this extent replace
  the shares to be sold by the Obliged Seller(s) to
  the proposed purchaser. The following provisions
  shall apply to each Tag-Along Sale

46
Shareholder Agreement

• (a) If (an) Obliged Seller(s) wish(es) to proceed
  with a Tag-Along Sale, it (they) shall deliver a
  written notice ("Tag-Along Rights Notice") to the
  Company. The Company shall immediately thereafter
  inform all other shareholders of such Tag-Along
  Rights Notice. The Tag-Along Rights Notice shall
  disclose in reasonable detail the proposed
  purchaser, the proposed number of shares to be
  sold, the proposed terms and conditions of the
  sale (including the proposed bona fide price) as
  well as a statement by the proposed purchaser
  whether it is offering to all other shareholders
  to purchase their shares or that it is offering
  to all other shareholders to purchase their
  shares in the pro rata amount set forth above and
  under the terms and conditions of the sale
  (including the proposed price) notified in the
  Tag-Along Rights Notice by the Obliged Seller(s)
  ("Purchaser's Offer").

47
Shareholder Agreement

• (b) Within 14 (fourteen) days of receipt of the
  Tag-Along Rights Notice, each other shareholder
  may by written notice to the Company, declare
  acceptance of the Purchaser's Offer (partial
  acceptance shall not be deemed an acceptance,
  except where the Obliged Seller(s) explicitly
  agree(s)) ("Acceptance Notice"). In the event
  that not all other shareholders participate in
  the Tag-Along Sale, the remaining (fraction of)
  shares shall be sold by the Obliged Seller(s).
• (c) The transfer of the shares to be sold and the
  shares covered by an accepted Purchaser's Offer
  shall be consummated as soon as practical after
  the delivery of the Acceptance Notice but in any
  event within 20 (twenty) days after the delivery
  of the last Acceptance Notice.

48
Shareholder Agreement

• Information / Approval Approval by the
  PE-investors in case of measures outside the
  ordinary of business regular reports on the
  development of operative business and of
  important financial indicators.

49
Shareholder Agreement

• Board Nominations The PE-investor will usually
  require to be able to appoint a member to the
  supervisory board or the advisory board certain
  essential business transactions will be subject
  to the approval of the board member appointed by
  the PE-investor.
• Registration Rights In particular in case of an
  intended initial public offering (IPO) in the US,
  the (US) PE-investors will demand the right to
  force company via qualified resolution to sell
  their shares in the course of an initial public
  offering (demand registration rights), or the
  right to register their stocks if the company
  itself plans an IPO (piggy-back registration
  right).

50
Banking documentation

• Loan Facility Agreement
• Term loan
• Overdraft
• Mezzanine Financing
• Security
• Security documentation
• Financial assistance issues
• Inter creditor Agreement between Bank, PE and
  (possibly) management

51
Thanks for your attention!

• Dr. Phillip Dubsky