What is the CARE?
The Convertible Agreement Regarding Equity – or ‘CARE‘ – is a standard form contract designed by industry to help streamline early-stage venture investments in Asia. Our series of eight articles covers the CARE’s key provisions to help founders and investors understand their purpose and effect.
The other articles in this series are:
When to use the CARE?
You can use the CARE where an investor will make an upfront cash investment in a company on the expectation of receiving shares in the future, i.e. they will not be receiving shares now.
This means you won’t need to put a specific value on the company (or its shares) at the time of the investment. Whether the investor ultimately receives shares, or something else (cash or another asset), will depend on which of a set of specified events happens first: an Equity Financing, a Liquidity Event, a Dissolution Event or an optional Maturity Conversion. Each of these events is unpacked in a separate article.
What does the CARE do?
The aim of the CARE is to standardise a bulk of the deal terms in line with market norms. The parties won’t need to reinvent the wheel each time, and can even automatically generate a CARE, meaning they can focus their attention on important deal-specific matters. Standardisation of the contract and the lack of a valuation do, however, mean the CARE is more suited to early-stage fundraising (seed or pre-Series A) where simplicity and efficiency are favoured.
How to use the CARE?
Within the CARE, the important negotiable deal terms take centre stage. These are:
- the 'Discount Rate' (see below)
- the 'Minimum Equity Raise' for an Equity Financing
- the 'Multiple' for a Liquidity Event
- the date and valuation cap for an optional 'Maturity Conversion'
Because the CARE will not fix a price for the company’s shares, the investor will usually get a discount on the future price of the shares. This discount recognises the heightened risk the CARE investor is accepting compared to a later-stage investor in an Equity Financing, or a purchaser in a Liquidity Event. The ‘Discount Rate‘ is 100% minus the discount percentage agreed with the investor. For example, if the agreed discount is 30%, the Discount Rate for the CARE would be: 100% – 30% = 70%. Discounts typically range from 10% to 30%; a higher discount (and a lower Discount Rate) benefits the investor.
Beyond the deal terms above, the CARE’s built-in tailoring options are intentionally limited. Investors should, however, ensure they understand the Liquidation Priority, and founders should familiarise themselves with the Most Favoured Nation and Information Rights as well as the company-specific Representations and Warranties.
Anything else?
The CARE will not be suitable for every single transaction in its standard form. However, at best, it can act as a ‘plug and play’ contract for efficient early-stage financings and, at worst, it can help kick-off investment discussions and act as a base for negotiations.
