From Russia With Love, Capital and Shareholders Agreements

The Russian government is on a mission to help the country shed its reputation for corruption and backwardness and instead be recognized as a hub for innovation and business development.

It’s investing more than $4 billion in Skolnovo, a technopark, business school and computer labs, near Moscow. Russia is looking abroad as well. In March, state-owned nanotechnology company Rusnano announced plans to invest up to $330 million in U.S. health care technology businesses.

Russia formally joined the World Trade Organization last summer, and by year’s end, President Obama approved a Senate bill that ended nearly four decades of trade sanctions against the country.

Now, venture funds are eager to invest in Russia, though deals are more complicated due to language barriers, the need for offshore entities and the lack of standardized deal documents.

None of those factors daunt Squire Sanders attorney Christopher Rose. Fluent in Russian, he coordinates the firm’s emerging markets private equity group from London and Moscow. He and colleagues Arman Pahlavan, co-chair of the private equity and technology practice in Palo Alto, Calif., and Greg Gale, the Cleveland-based co-chair of the global equity practice, shared their thoughts on the challenges of cross-border deals.

Venturing to Russia

Traditionally, growth capital funds have been Russian funds with international investors, Rose says, but in the past year-and-a-half, he’s seeing more venture funds investing in Russian technology, consumer-facing industries and telecommunications. He says that ecommerce sites are poised to boom as Russians begin using credit cards for online purchases.

Yandex, known as “the Google of Russia,” raised $1.3 billion in its 2011 IPO. Squire Sanders represented Almaz Capital Partners in its investment. The firm also advised Goldman Sachs European Special Situations Group in its investment in Group Inc., the large Russian Internet company founded by Yuri Milner.

Rose last fall advised Intel Capital as it led a $4 million round in Eruditor, a Russian e-commerce site, and he’s seen Mangrove Capital Partners of Luxembourg, Ventech Capital of France and Soffinova Ventures send capital into a mix of Russian businesses.

One of Russia’s hottest ecommerce sites is online retailer KupiVIP, which has scooped up $104 million from investors, including Bessemer Venture Partners and Intel Capital.

In Agreements

Early stage VC activity, such as Series A and B rounds, has grown only in the past three or four years in Russia, Rose says. With such a short history of VC funding, deals continue to be done in Russia without standard deal documents, which spell out routine deal terms in U.S. transactions.

Russian deal documents can be an amalgam of templates from the National Venture Capital Association and based on European terms, which may use just a shareholders’ agreement and a subscription agreement. That’s where things can get complicated, Rose says.

“Depending on who’s negotiating, I may try to [explain] that, well, if you combine this agreement with this and that, it’s like your shareholders’ agreement. It’s still a learning curve for the founders to understand how this works,” he says.

His clients often initially seek to invest directly in a Russian company, prompting Rose to explain the importance of proper documents to protect both parties with enforceable rights. He hopes to help solve this problem by collaborating with several funds to develop standardized documents that will trim negotiation time.

“As Russia evolves over the next few years and there are more VC transactions, you’ll find an equilibrium,” he says, as he describes standardized documents for Russian deals as “inevitable.”

Investors in Russia tend to have more aggressive expectations than other markets, though they’re the norm there.

“Compared to a European transaction, a minority shareholder in a Russian deal wouldn’t typically get a drag-along provision,” Rose says, “But you see a lot of that here right off the bat in growth capital transactions.”

Doing Diligence

Performing due diligence in Russia is more complex than elsewhere, Pahlavan says. “You need to have GPs there for many years who know the terrain, who can check things out,” he says. “You want to have trustworthy people around the table,” especially those familiar with overseas anti-fraud provisions.

Rose adds that research into Russian companies takes longer and requires more intensive review.

“It’s not like you can just get a quick report or good-standing certificate or look up a company very easily,” he says.

Companies that are most likely to succeed tend to partner with local players and strong advisors to help manage risk.

Settling in the States

Many European founders who launch early-state tech companies at home are eager to relocate to the United States for better access to capital. After all, they consider the VC community in the United States, to be “healthier,” Gale says.

He cites two clients founded in Britain, Summly, an app that creates concise summaries of news articles, and which has received more than $1 million from investors, and Blippar, an image-recognition phone app, scored seed funding from Qualcomm Ventures in 2012.

Also on Gale’s radar is client Decisyon Inc., an Italian business analytics software company that has relocated to the United States. In the fall, it raised a $14.6 million round of Series A funding led by Axel Johnson Inc.

“Folks want to have that top tier of the company be incorporated in the States or someplace where there’s an easier exit strategy,” Gale says.

Cross-border transactions now account for more than half the deals handled by Squire Sanders’ U.S.-based attorneys. Though deals may be literally all over the map, investors share the same concerns.

“One of our clients was recently saying that what keeps him up at night is not the crush of bureaucracy but whether the business plan he’s looking at is feasible and whether he has faith in the management team,” Rose says. “That’s the same thing you’d see anywhere in the world.”

Attorneys at a Glance


Age: 48

Co-chair of the private equity and technology practice

Spends about 40% of his time advising funds, 60% advising portfolio companies

Based in Palo Alto


Age: 41

Coordinator of the emerging markets private equity group

Spends nearly all his time advising funds

Fluent in Russian, he splits his time between Russia and London


Age: 42

Partner, co-chair of the global equity practice

Spends 75% of his time advising companies, 25% advising funds

Based in Cleveland

June D. Bell is a San Francisco-based legal affairs reporter. She can be reached at