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Legal Research Memo About : SSA / SPA / SHA

What are Definitive Agreements?

If you have raised funds in the past or have tracked investments in startups, you would have definitely come across
terms like: SSA, SHA, SPA or Definitive Agreements. Let’s aim to demystify these terms in this blog.

Definitive Agreements

In the context of investment, a ‘definitive agreement’ is the final, legally binding document signed by all the parties
of the transaction which puts forth the agreed terms along with rights and obligations of the parties involved in the
transaction. Some things to note:

 Legally binding document. Typically executed on a Stamp Paper with appropriate stamp duty paid based
on the local jurisdiction

 Signed by all the parties involved in the transction

 Most Common Examples: Shareholders’ Agreement (SHA), Share Subscription Agreement (SSA), Share
Purchase Agreement (SPA)

 Termsheet is not a definitive agreement. But definitive agreements typically follow the signing of a term
sheet

 Definitive documents are necessary and form the basis of consummating certain transactions such as sale
of shares between parties, issuance of shares against investment among others

 Definitive agreements contains terms of the transaction, right and obligations of parties and many other
standard legal clauses which we’ll discuss in this blog series

What is a SSA?

A Share Subscription Agreement (SSA) as the name indicates is related to subscription of new shares of the
company by a set of existing or new shareholders. Points to note:

 SSA is executed when a company is raising an investment from investors in lieu of shares issued by the
company to the investors. Such shares are said to be ‘subscribed’ by the investors and hence the name SSA

 SSA typically consists of the details of the subscription — amount, share price, number of securities,
relevant dates and capitalization table (shareholding) details

 In some cases, SSA can also be integrated within the SHA document which details the other terms of the
transaction between the shareholders. In such cases it is typically referred to as a SSA/SHA or also simply
as SHA

What is a SPA?

A Share Purchase Agreement (SPA) is executed between parties when one party is buying or ‘purchasing’ shares
from existing shareholders. Hence the name Share Purchase Agreement
Like in case of SSA, sometimes SPA too is part of the larger SHA document and is referred to as SPA/SHA.

What is a SHA?

 Shareholders’ Agreement is a comprehensive definitive agreement entered into by shareholders and the
company and outlines the rights, preferences and obligations of all the shareholders.

While subscription of shares makes a shareholder the economic owner of the company, it is the provisions
contained in the SHA that determines the extent to which the company and promoters are ceding the control and
governance of the company to certain shareholders, typically the investors.

Some examples of such rights and preferences are:

 Board Reconstitution: offering board seats to investors,

 Liquidation preferences, anti dilution, exit rights

 Reserved matters or affirmative rights of the investor,

 Pre-emptive and share transfer rights (ROFO/ROFR) etc.

Apart from rights and preferences, SHA would also contains standard clauses around:

 Breach, Events of Default by parties and Termination

 Reps & Warranties, Indemnity, Confidentiality

 Non Compete, Promoter Lock-in etc.

 Dispute Resolution, Arbitration, Governing Law etc.

 Shareholding pattern /cap tables, milestones and business plan in the Annexure

 ESOP Pool size and creation

We’ll cover these aspects in detail in the coming editions.

SHA vs. Termsheet?

Many a times, SHA and Termsheet are interchangeably used as the document against which an investment is raised.

They are In this regard, you might have heard of cliched analogies such as

Termsheet is like an engagement, while SHA is the actual marriage of sorts between the startups and investors in
some sense.

I like this analogy :)

Here are a few more points that you can make note of:

 Termsheet is Intent: Termsheet is generally only a ‘firm intent to invest’ by the investor with the defined
terms. It also is an abridged version of the eventual SHA/definitive agreement that parties would sign.
  SHA is Binding: However, SHA is a legally binding document and not abiding by it will constitute a
breach.

 Can Investors renege on a signed termsheet? While investors can technically renege on a termsheet
commitment, it is not an ideal situation. That said, there have been cases I have seen personally where a
deal has not gone through post the execution of termsheet.

There can also be technical grounds on why deals fall through after signing of termsheets. Such as:

 Period to Accept: There is a max period of acceptance of a termsheet when an investor issues it (typically
2 week or lesser, could also be 4 weeks in some cases when one is closing a larger round).

 Period to Close Round:There is also a maximum time to close the deal (in many cases it is the execution
of definitive documents) which could be 8 weeks or 12 weeks. If startups don’t accept or close the deal in
these cases, the termsheet becomes no longer valid and investors have all the right to walk away.

Notwithstanding these max periods to accept/close, if the ‘intent to invest’ is strong — then these timelines don’t
matter! I have seen a deal going through after 1.5 years of signing the termsheet! :)

Jab Miyan Biwi Raazi, To bhala kyun banein hum Kaagazi?

(Translation: When the bride and groom have agreed, then what’s the point of the paperwork?)

 Any Conditions Precedent to signing Definitive documents not met: This could be any criteria like
transfer of IP, hiring of key management, founders quitting their fulltime jobs etc. which are part of the
termsheet.

 Due Diligence Red Flags: Investors do a formal due-diligence of the startups they invest in. This involves
studying all aspects of a startup from a legal and financial standpoint. Any inconsistencies, gaps are
highlighted and need to be cured. Occasionally if the issues are severe, it might lead to the deal falling
apart.

Stay tuned for more and let’s explore this #SHA elephant together as we discuss the various investor rights, terms
and clauses in the coming editions.

You can also use Qapita to manage all your investment rounds, security classes, investor rights such as liquidation
preferences as well as run future scenarios.