1. INTRODUCTION
Entrepreneurship and innovation investments are essential to economic development, as they create solutions in the form of companies. These companies may be formed in the classic way, by opening a traditional business, or in an innovative way, using technology to develop scalable products and services these are known as startups. Startups are not merely good ideas; they play a fundamental role in creating innovative solutions quickly, something that is very difficult for established companies to achieve, since these must follow more mature corporate governance rules and deal with slower, more bureaucratic decision-making processes to review and approve such new businesses.
This potential for innovation at an accelerated pace has already translated into concrete results: in recent years, startups have been responsible for innovations that transformed several sectors, such as financial services offered by fintechs and digital banks, online shopping platforms, and on-demand delivery services that add convenience to everyday life. Today, this development is increasingly focused on artificial intelligence, a technology that has been redefining products, services, and business models across different sectors.
None of these transformations, however, would be possible without capital: to be born and to grow, these startups depend on investments, which may take different forms and occur at different stages of maturity, offering investors a new type of asset with the potential for financial return for those who believe in the theses and products developed by entrepreneurs.
It is precisely this type of asset, that is, investment in startups, that structures Venture Capital. In this chapter of Doing Business in Brazil, we will address Venture Capital investments at their different stages of maturity. We will analyze the investment journey, the most commonly used legal models and instruments, as well as the essential precautions before liquidation, indispensable aspects for investors to understand the landscape before taking part in an investment round.
1.1. VENTURE CAPITAL IN BRAZIL
To understand the specific features of Venture Capital in Brazil, one must first understand how the ecosystem developed in the markets that served as a reference, especially the United States and Europe. These markets are more mature, owing to structural and historical factors that fostered pioneering activity, such as the Silicon Valley technology hub, which created an environment conducive to innovation and investment. It was this U.S. model that, as it spread, came to be adapted to the reality of each country. Brazil, however, does not reproduce that same prototype: here, the ecosystem followed its own path, with an entrepreneurial environment that has evolved not only around technological innovation but also around the need to address local inefficiencies.
This distinctive path, moreover, rests on a relevant competitive advantage the country enjoys for distributing new products and services: its large population base, which exceeds 213 million inhabitants. This significant domestic market, combined with socioeconomic and regional diversity, offers an environment conducive to testing, adapting, and scaling innovative business models. Startups that manage to tailor their solutions to the needs and consumption habits of this population have greater potential for growth and for attracting investment, in addition to creating a competitive edge for later international expansion.
2. CORPORATE STRUCTURES
Before raising capital, a startup must be organized under an appropriate corporate form, since the chosen structure defines how the investor will join the ownership base, how economic and political rights will be distributed, and the degree of complexity of future rounds. In Brazil, the two most common forms are the limited liability company (Ltda.) and the corporation (S.A.).
2.1. CORPORATE FORMS
2.1.1. LIMITED LIABILITY COMPANY (LTDA.)
The limited liability company is the simplest form and the least costly to maintain, which makes it common in the early stages, when the ownership base is still small and operations are not very complex. This cost saving stems from a set of factors that distinguish it from the corporation (S.A.): (i) its incorporation and subsequent amendments are made through articles of association registered with the Board of Trade (Junta Comercial), without the formalities required of a corporation; (ii) there is no requirement for multiple partners, and a limited liability company may be formed with a single partner (single-member company); (iii) there is no obligation to publish corporate acts and financial statements in newspapers or official gazettes, which eliminates a significant recurring cost; (iv) management is leaner, dispensing with bodies such as a board of directors and a fiscal council; and (v) accounting and governance obligations are less stringent than those imposed on corporations. Together, these factors reduce both the cost of forming and the cost of maintaining a limited liability company.
On the other hand, this same simplicity limits the structure’s flexibility, which tends to complicate more sophisticated Venture Capital rounds. It is therefore not unusual to find clauses providing for the conversion of the limited liability company into a corporation before carrying out conversions of instruments convertible into equity.
2.1.2. CORPORATION (S.A.)
The corporation, in turn, is the structure preferred by professional investors precisely because its legal regime accommodates the mechanisms typical of Venture Capital. Since the capital stock is divided into shares rather than quotas, the company can create different classes of shares and assign to each distinct economic and political rights on a firmer statutory footing.
This is what makes it possible to issue preferred shares to investors, with advantages such as priority in receiving proceeds in a liquidity event (liquidation preference) and anti-dilution protection (both detailed in item 7), without stripping the founders of management control of the business.
The same regime authorizes the establishment of a board of directors, a body on which investors usually negotiate a seat to monitor strategic decisions, and the adoption of stock option plans, through which the startup sets aside shares to compensate and retain key professionals.
For this reason, it is common for a startup to be initially formed as a limited liability company and, as it matures and approaches larger rounds, to convert into a corporation, adapting the vehicle to more complex corporate structures in order to meet the requirements of new investors and the contractual clauses that will be negotiated.
3. CAP TABLE DISTRIBUTION
Once the corporate form has been defined, the next step is to understand how the equity in the startup is distributed among the different holders. Given that investors prefer to enter into instruments convertible into equity in order to protect themselves against potential operational risks of the investee, there is a need to control the capital stock taking into account all such instruments duly converted, that is, on a fully diluted basis. To this end, the cap table is the document that records this distribution, indicating who holds equity in the company and in what proportion, projecting a scenario on a fully diluted basis. It is from the cap table that one assesses the balance of power among founders, investors, and advisors, and the room available for new contributions.
3.1. COMPOSITION AND DILUTION
As a rule, a startup’s cap table is made up of three main groups: the founders, who start out holding all or most of the equity; the investors, who come in at each round in exchange for new shares; and the equity pool, which consists of an amount of equity reserved for c-level employees and advisors.
At each new investment round, the issuance of equity to the new investors reduces the percentage held by the previous holders a phenomenon known as dilution. Dilution is not, in itself, negative: it is the natural counterpart of the entry of new capital that funds growth, making the company far more valuable and representing a higher value in absolute terms. What is sought is a balanced distribution that preserves sufficient incentive for the founders and room for subsequent investment rounds, if necessary.
As an example of a balanced distribution, consider a startup that, upon entering a Series A round (as detailed in item 4 below), keeps the founders with a majority or near-majority stake, sets aside an option pool consistent with the planned hires, and concentrates the investors’ stake in a few relevant funds. In this scenario, the founders retain incentive and control to run the business, there is room to accommodate new investors in the following rounds, and decision-making remains agile, which makes the company more attractive for new contributions.
In contrast, a problematic cap table usually results from decisions made in the early stages without planning. This is the case, for example, of the startup that distributes generous stakes to a large number of angel investors and service providers right at the outset, leaving the founders with a small slice even before the first institutional round. This fragmentation produces several negative effects: it reduces the incentive of the founders precisely those who need to stay dedicated to the project, makes decision-making harder because there are many holders with dispersed interests, and leaves little margin for the inevitable dilution of the next rounds, potentially rendering the entry of new investors unfeasible or forcing complex corporate reorganizations before the contribution.
3.2. EMPLOYEE PARTICIPATION
One of the slices of the cap table is reserved for the participation of c-level employees. Since early-stage startups can rarely compete with the salaries paid by established companies, it is through the prospect of sharing in the capital, and therefore in the future appreciation of the business, that they attract and retain key professionals.
3.2.1. OPTION POOL
The starting point is the option pool, a percentage of the capital stock reserved to be offered to c-levels, consultants, and board members. Because it takes up space in the cap table, the size of the pool is usually negotiated with investors during the rounds, who assess its impact on dilution and on the startup’s ability to attract talent in the following stages.
3.2.2. STOCK OPTIONS
From this pool, the startup grants stock options that is, the right of the employee to acquire shares of the company in the future at a pre-set price, benefiting from the difference should the company’s value rise. While the option pool answers the question of how much of the capital is reserved for incentives, it remains to define when and how each beneficiary actually acquires the equity a role played by vesting.
3.2.3. VESTING
Vesting is a contractual instrument whereby the right to the equity, or the right to exercise the options, is acquired gradually, conditioned on the professional’s length of stay at the company or on the fulfillment of previously defined goals, such as reaching performance indicators or the occurrence of a liquidity event (as detailed in item 5 below). It is precisely vesting that gives the mechanism its retention function, since the full benefit only materializes for those who remain and contribute throughout the established period.
3.2.3.1. CLIFF
Within this schedule, the cliff is the initial waiting period that precedes the start of equity acquisition. During this interval, no portion is acquired, following an all or nothing logic: if the beneficiary leaves the company before completing it, nothing vests and they entirely lose the promised equity; if they remain until its end, they begin to vest the portion corresponding to the period already elapsed, and, from then on, acquisition occurs periodically over the remainder of the schedule. The cliff thus works as a filter of initial commitment, protecting the startup against so-called dead equity, a stake retained by someone who leaves early, without having contributed meaningfully to the growth of the business. It is important not to confuse the acquisition of the right with its financial realization: completing the cliff and vesting means consolidating the right to the equity or the options, but the conversion of that right into cash normally only takes place in a liquidity event (as detailed in item 5 below), such as the sale of the startup or an initial public offering. Until then, even if fully vested, the equity remains illiquid.
4. INVESTMENT ROUNDS
Venture Capital investment does not occur at a single moment, but over a journey made up of successive stages, each with its characteristic investors, amounts, and levels of risk. Understanding this sequence from the initial fundraising to the eventual liquidation is essential to situate the moment at which each investor comes in and what is expected of the startup at each phase. The following topics walk through this journey in the order in which it usually unfolds.
It is important to note, however, that this sequence of rounds is neither a mandatory nor necessarily linear path. Each startup’s funding trajectory will depend on its business model, its actual need for capital, its speed of growth, and the strategic opportunities available. Thus, a startup may reach a high level of maturity, become financially sustainable, or even carry out an exit, such as a strategic sale or an initial public offering, without necessarily going through all the investment rounds described below.
4.1. FFF (FAMILY, FRIENDS AND FOOLS)
The first investors in startups are people close to the entrepreneurs, the so-called FFF that is, Family, Friends and Fools. At this stage, the business is still simple and little developed, supported by people closest to the founder, who encourage them with low-value funding to provide initial support for developing the minimum viable product to be offered to future customers. From this small contribution, the founders refine the ideation and develop the first versions of the product progress that, once demonstrated, opens the way to attracting the first truly professional investor.
4.2. ANGEL INVESTORS
Once the initial support of the FFF is overcome, the next stage usually involves angel investors. These are individuals, generally experienced entrepreneurs or executives with a track record in the market, who invest their own financial resources in startups in the early stages of development. In addition to capital, angel investors usually offer strategic support, mentoring, and networking connections, helping to accelerate the growth and consolidation of the business. Generally, angel investors act on their own, through organized groups of angel investors, or through equity crowdfunding platforms.
4.3. SEED MONEY
When the startup needs more robust resources than angels usually contribute, the seed money stage arrives. The name reflects its function: it is the investment that “plants” the foundations of the business, made in the early stages of a startup, after the founders’ own contribution of resources and, in some cases, that of angel investors. The main objective of seed money is to finance the company’s initial development, such as creating the minimum viable product, validating the business model, market testing, and building the team, before the company has significant revenues. Generally, seed money investments are made by investment funds specialized in Venture Capital and involve total investment amounts higher than those provided by angel investors. They are, therefore, professional investors.
4.4. SERIES A
After the maturation phases and the previous investments, the startup may raise funds through investment rounds named, in chronological order, by the letters of the alphabet. The first of these is Series A, carried out when the startup has already validated its business model and shows traction and growth indicators (customers, recurring revenue, or strong user-base growth). If seed money financed the initial validation, Series A capital is aimed at scaling what already works: optimizing the product, expanding the team, growing operations, and consolidating market presence. The amount invested is usually larger than in seed money, and investors expect a clear plan for scalability and monetization.
4.5. SERIES B
Once Series A is consolidated, Series B serves the startup that already shows consistent growth and seeks capital to significantly expand its operations, whether by expanding into new markets, diversifying products, or investing in large-scale marketing and sales. Series B investors analyze more robust performance metrics, such as unit economics, customer acquisition cost, and lifetime value, in addition to proven scalability.
4.6. SERIES C
In Series C, the startup has already achieved a strong market presence and seeks funds for aggressive acceleration, such as international expansion, acquisition of competitors, or development of new product lines. Investors at this stage include not only venture capital funds but also private equity, investment banks, and, in some cases, strategic companies (corporate venture). The risk is lower than in the early stages, but the capital contributions are much more significant.
5. EXITS
These are the ways in which investors and founders realize the financial return on the capital and time invested in a startup, converting their equity into liquidity. In other words, it is the moment of “exit” from the investment, when the company’s shares or quotas are sold, in whole or in part, to third parties. The exit is a strategic moment both for the investor, who seeks to maximize their return, and for the startup, which may gain new partners, capital, and expansion opportunities. The main types of exits include, among others: (i) sale (M&A), which occurs when the startup is sold to another company or investor, whether to absorb its technology, team, or customer base or, strategically, to eliminate a competitor from the market; (ii) Initial Public Offering (IPO), which occurs when the startup reaches the maximum level of maturity and carries out an initial public offering of shares (IPO) on the stock exchange, allowing its shares to be sold on the market; (iii) secondary sale, which occurs when investors sell their stakes to other investors, funds, or strategic partners, without the startup necessarily changing shareholder control; and (iv) buyback, which occurs when the startup itself repurchases the investors’ shares, generally to concentrate corporate control or adjust its cap table.
This entire investment cycle, from ideation to exit, normally requires a development period of between 5 and 10 years to complete. This interval reflects the time needed for the startup to validate its business model, scale operations, gain a relevant market share, and generate the return expected by investors. Although a few isolated cases reach liquidity more quickly, most venture capital success stories demand a long-term vision, strategic patience, and the ability to sustain growth over the years.
6. INVESTMENT INSTRUMENTS
The legal investment instruments used in startups and early-stage companies can take various forms, according to the investor’s profile, the company’s stage, and the objectives of the transaction. They are generally divided into investments made directly, through contracts entered into between the investor and the startup, granting the investor a direct stake in the startup’s quotas or shares, and indirectly, through contracts that grant the right to convert into equity in the startups.
6.1. DIRECT INVESTMENT
In the case of direct investment, the investor themselves enters into the investment or purchase-and-sale agreement directly with the startup and/or its founders to receive quotas or shares of the startup in exchange for the capital contributed. After the investment, the investor becomes a partner of the startup, fully assuming both the liability risks arising from the commercial activity and the potential benefits of the contribution. In this modality, the contract tends to be more complex and less flexible, given that the investor will have to negotiate indemnification mechanics and limits for any losses outside the ordinary course of business.
This differs from indirect investment, which grants the right to convert into equity in the event of a liquidity event, mitigating the risk of liability for losses incurred by the startup during the conduct of its business.
6.2. INDIRECT INVESTMENT
Indirect investment is formalized through contracts that grant the right to convert into equity in the startups, in an amount proportional to the amount contributed and to the startup’s estimated valuation. The traditional instruments for this structure are the Simple Agreement for Future Equity (SAFE) and the Convertible Loan (Mútuo Conversível).
6.2.1. SIMPLE AGREEMENT FOR FUTURE EQUITY – SAFE
The SAFE is a contractual instrument originally created in Silicon Valley, by the accelerator Y Combinator, to simplify investments in startups in the early stages. It works as an agreement whereby the investor contributes resources to the startup in exchange for the right to receive equity in the future, generally in the next qualified investment round or in a liquidity event.
Unlike a convertible loan agreement (addressed in item 6.2.2 below), the SAFE is not a loan agreement: it has no maturity date, no acceleration clause, and no payment of interest. The conversion of the invested amount into equity occurs according to pre-established conditions, such as a valuation cap (maximum valuation of the company) and a discount rate (discount on the price per share in the future investment round).
The main advantage of the SAFE is its simplicity: by reducing complex negotiations, transaction costs, and exposure to liability for the startup’s activities, it allows the company to receive the contribution quickly and focus its efforts on growth, while the investor secures preferential conditions to participate in the capital in the future.
6.2.2. CONVERTIBLE LOAN (MÚTUO CONVERSÍVEL)
The convertible loan is a loan agreement in which the amount contributed by an investor to a startup may be converted, in the future, into equity, instead of being repaid in cash. This instrument is widely used in the early stages of fundraising, as it allows the exact definition of the company’s value (valuation) to be postponed to a more appropriate time, generally when the startup is more mature and has clearer performance metrics.
The agreement also defines the conversion conditions, such as the percentage discount on the price per share in the future round (discount rate) or the maximum valuation cap of the company (valuation cap), and sets deadlines, acceleration events, and, in some cases, the accrual of interest until conversion in a liquidity event. If the liquidity event does not occur and, consequently, conversion also does not occur within the deadline or under the conditions provided for, the investor may choose to demand the amount back, plus the stipulated charges.
However, it is worth noting that Venture Capital investment is considered a high-risk investment and that the entire amount contributed will be used by the entrepreneurs in developing the startup’s products and operations. Therefore, if the startup does not reach a liquidity event, the probability of the investor demanding the invested amount and actually receiving it back is very low.
Although the SAFE and the Convertible Loan (Mútuo Conversível) have the same objective, they differ in their legal nature and in their practical implications. The SAFE is not a loan agreement, does not provide for a maturity date or the charging of interest, and is simpler and more flexible, focused on reducing bureaucracy and speeding up the contribution. The Convertible Loan, on the other hand, is formally a loan agreement, with a defined term and the possibility of returning the capital plus interest if conversion into equity does not occur, offering greater protection to the investor. In practice, the SAFE is more agile and widely used in more mature ecosystems, while the Convertible Loan is more common in Brazil because it is aligned with local corporate and tax legislation.
7. PRE-INVESTMENT PRECAUTIONS
Before making any contribution to a startup, it is essential that the investor adopt a series of pre-investment precautions to mitigate risks and increase the chances of return. These precautions include a detailed analysis of the business model, the founders’ background, the company’s financial and accounting situation, intellectual property, contracts in force, and potential legal liabilities. In addition, it is important to understand the corporate structure, the rights and duties of investors set out in the investment agreements, and to assess the strategic alignment between the investor’s objectives and the startup’s growth plans. This prior due diligence makes it possible to identify hidden risks, clarify responsibilities, and make more informed and secure investment decisions.
In practice, this due diligence focuses on verifying a few critical factors, detailed in the topics below.
7.1. CAP TABLE
The cap table, as mentioned in item 3 above, represents the corporate structure on a fully diluted basis and may be considered bad or poorly structured when disorganized or excessively diluted. This happens due to the presence of many investors and strategic advisors and a low founders’ stake, making decision-making and future investment rounds difficult and reducing the return of capital on investments, since little margin remains for the entry of new investors and the founders hold little equity, which reduces the amount of profit earned by the founders in a possible liquidity event.
7.2. HIDDEN INFORMATION
A lack of transparency in the information provided by the startup to potential investors may lead to mistaken investment decisions. This breaks the investor’s trust, since it may compromise their investment due to a lack of transparency.
7.3. FOUNDERS’ COMMITMENT
This risk arises when there are founders not dedicated full-time to the business, resulting in low commitment to the startup’s development, given that the founder is a central figure in running and developing the venture and their absence directly compromises its growth.
7.4. IRREGULAR INTELLECTUAL PROPERTY
This problem occurs when the startup’s intellectual property is not duly registered with the competent government bodies and, consequently, this intellectual property is not protected. This absence of registration or lack of contractual protection may represent a legal risk in the investment, since it compromises the exclusivity of the startup’s product and the ownership of the innovation developed, potentially creating long and costly legal disputes. It is worth noting that the most important asset of an innovation and technology company is precisely the invention behind the solution presented by the startup, and a flaw in its intellectual property may directly harm the startup’s economic valuation.
7.5. INADEQUATE TAX FRAMEWORK
The tax framework is a fundamental and strategic element for any company, as different tax regimes may generate significant financial impacts depending on the activity carried out. An incorrect framework may result in unnecessary tax costs that could be avoided with the appropriate choice of regime. In addition, this failure may reveal a deficiency in the company’s financial planning, since efficient cost management is essential in any venture and avoidable costs are always undesirable.
7.6. PROBLEMATIC CONTRACTS ENTERED INTO IN THE PAST
Poorly structured, poorly negotiated, or unfavorable contracts previously entered into by the startup may generate unwanted obligations, corporate conflicts, or restrictions on the healthy growth of the company or on future investment rounds. The analysis of these contracts during due diligence is essential to identify risks and protect investors against harmful commitments made by the founders that may compromise the cap table, the valuation, and future investment rounds.
7.7. HIGH LEVEL OF INDEBTEDNESS
Financial statements that show high indebtedness represent a relevant risk for the investor, as they may compromise financial planning, liquidity, the sustainability of the business, and the possibility of taking on new strategic debt that may be essential to the company’s scalability.
8. RELEVANT CONTRACTUAL CLAUSES
Contractual clauses play a central role in structuring Venture Capital transactions, as they define rights, duties, and guarantees for both investors and the startup’s founders. They regulate essential aspects such as equity participation, governance, anti-dilution protection, exit conditions, investment conversion mechanisms, and financial reporting obligations. Understanding these clauses is fundamental to mitigating risks, aligning expectations between the parties, and ensuring that the investment is structured in a safe and strategic manner. The topics below detail the main ones.
8.1. MONITORING OF MANAGEMENT
This clause establishes the mechanisms by which investors can monitor the startup’s management, ensuring transparency in the use of capital and in the performance of the business. This monitoring may include the requirement of periodic reports, the right to appoint advisors, and the possibility of requesting independent audits, ensuring that strategic decisions are aligned with the investors’ interests.
8.2. VALUATION, CONVERSION, AND INDEXER
This clause addresses the definition of criteria for valuing the company and the parameters for converting the investment into equity. The valuation refers to the process of determining the company’s value; the conversion consists of transforming the investor’s credit into quotas or shares; and the indexer is the index used to monetarily update the value of the investment over time. These elements are essential to pre-determine the company’s value at the time of conversion, calculate the equity to which the investor will be entitled, and protect the invested amount against inflation or devaluation.
8.3. ACCELERATION AND PENALTIES
This clause establishes the conditions that may lead to the early acceleration of the contractual obligations and to the corresponding penalties. Among these situations are breach of contract, insolvency of the company, or misuse of funds, for example. The objective is to protect investors, ensuring reaction mechanisms in case the company fails to comply with essential commitments set out in the contract.
8.4. GOVERNANCE, QUORUMS, AND AFFIRMATIVE/VETO VOTE
This clause establishes the rules for decision-making at the company’s meetings. Governance defines the management structure and the decision-making processes; quorums indicate the minimum number of participants required for a resolution to be valid. The affirmative vote or veto right allows the investor, even as a minority shareholder, to approve or block certain strategic decisions, ensuring the protection of their interests and their participation in the company’s growth direction.
8.5. DRAG ALONG
It is a clause that establishes the obligation of a joint sale, allowing majority shareholders to compel minority shareholders to sell their equity in certain liquidity events. This situation generally occurs when the majority shareholder decides to sell the company in its entirety, and not just their own stake. Without this clause, minority shareholders could refuse to sell, negotiate different terms, or resort to the courts, making it difficult to complete the transaction. In this sense, the drag along may be essential to enable the exit, as it ensures that all shareholders are required to sell their equity on the same terms applicable to the transaction, preventing the resistance of one or more minority shareholders from blocking the full sale of the company.
8.6. TAG ALONG
Unlike the drag along, the tag along guarantees minority shareholders the right to follow the sale of the majority shareholders’ equity, on the same terms. This mechanism protects minority shareholders against possible losses resulting from the exit of a large investor, allowing them also to sell their shares on the same terms negotiated by the majority shareholders.
8.7. LOCK-UP
This clause establishes restrictions on the sale of shares before certain conditions are met, which may be based on a time period or on specific targets. It is generally applied to the founders, with the aim of ensuring that they remain in the ownership base and fulfill the defined commitments before they can dispose of their stakes.
8.8. FOLLOW-ON
This clause guarantees investors the right to participate in future investment rounds, with the aim of preserving their equity in the startup. It protects against the dilution of equity, which occurs when new shares are issued to attract new investors in subsequent rounds.
8.9. ANTI-DILUTION OR DOWN ROUND PROTECTION
This mechanism protects investors in cases of new investment rounds in which the valuation is lower than that of the previous round (down round). The clause adjusts the price of the investors’ shares downward, ensuring that they receive more shares and thus preserve their proportional equity in the company, avoiding the dilution caused by the lower valuation.
8.10. OPTION POOL
As detailed in item 3.2.1 above, the option pool corresponds to a percentage of the capital stock reserved to be offered to key employees, consultants, and board members as part of their compensation or incentive. This mechanism aims to attract and retain talent, aligning the interests of employees with the success of the company, since they come to have a stake in the growth of the business.
8.11. LIQUIDATION PREFERENCE
It sets the order of priority in the distribution and liquidation of proceeds to the startup’s investors in liquidity events, such as a sale, merger, or winding up of activities. This clause ensures that certain investors receive their invested capital first, protecting them in scenarios of limited returns.
9. POST-INVESTMENT GOVERNANCE
The relationship between investors and founders does not end with the capital contribution; on the contrary, it is from that point that a continuous dynamic of monitoring and joint decision-making begins. Post-investment governance defines how this relationship will be conducted in the startup’s day-to-day operations, balancing the autonomy needed for operations with the protection and information rights afforded to investors.
The main instrument of this structure is the shareholders’ (or partners’) agreement, which consolidates the rules of corporate coexistence and details the rights and duties of each party. It governs matters such as the composition and functioning of the board of directors (which may be established or merely take the form of an advisory board), the matters subject to qualified voting or veto, the rules for transferring stakes, and the mechanisms for resolving conflicts among the partners.
The board of directors, when established under the bylaws or in its advisory form, becomes the main forum for strategic decisions. It is common for investors to negotiate the right to appoint one or more board members, securing a seat in the most relevant deliberations without, however, taking over the day-to-day management of the business, which remains with the founders, ensuring autonomy and operational speed.
Finally, information rights ensure the investor periodic access to the startup’s financial statements, management reports, and performance indicators. These rights allow continuous monitoring of the use of capital and the evolution of the business, functioning as the informational basis on which all the other governance mechanisms operate.
10. CONCLUSION
Throughout this chapter, we have traced the journey of Venture Capital investment in Brazil: from the initial decision on the most appropriate corporate structure, through the composition of the cap table and the successive fundraising stages, to the legal instruments, the precautions prior to due diligence, and the contractual clauses that govern the relationship between investors and founders. We have also seen that this relationship does not end at the contribution: post-investment governance is what sustains the partnership over the years that separate the fundraising from the eventual exit. Understanding each of these stages is what allows the investor to mitigate the risks inherent in this type of transaction and the entrepreneur to structure their startup so as to attract quality capital.
Venture Capital in Brazil, although still maturing compared to more consolidated ecosystems, certainly offers the legal framework and the volume of capital needed for entrepreneurs and investors to conduct this journey with legal certainty and efficiency.
Authors: Rodrigo Paes de Barros e Gabriela Dantas de Martins
Candido de Oliveira Advogados
Rua Santa Luzia, 651 – 23º andar – Centro
BR-20030-041 Rio de Janeiro – RJ
Tel (21) 2240 7746
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BR-4548-003 São Paulo – SP
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