4: PE Contracts Flashcards
1
Q
- Term Sheets
A
- A contract; or an anchor before further due diligence.
- VC typically offers term sheet to the potential portfolio company
- Non-binding agreement
- Basic terms and conditions under which an investment will be made
- valuation, investment amount, percentage stake, voting rights, liquidation preference, anti-dilutive provisions, and investor commitment etc. …..
2
Q
- Due Diligence
A
- “Selskapsgjennomgang”
- “Full investigation of a product and transaction before the transaction takes place”
- Research in company, collect info, investigation
- Examination of financial records before entering proposed transaction
3
Q
- Fully Diluted Basis
A
- Assumption that all preferred stock is converted and all options are exercised
4
Q
- Fully Diluted Share Count
A
- Total number of common shares after all sources of conversion are exercised.
5
Q
- Capitalization Table
A
- Pre-Financing compared to Post-Financing
6
Q
- Proposed Ownership Percentage
A
- Proposed ownership to investor
7
Q
- Tranches
A
- Investments over multiple periods
- Common in weak markets (post-boom e.g.)
8
Q
OPP
A
Original Purchase Price
- Price per Share
9
Q
- Aggregate Purchase Price (APP)
A
- Price paid for all shares of a security
APP = OPP * shares purchased APP = P * #
10
Q
- Pre-Money Valuation
A
Market Cap before VC investment
Post Market Value – Investment = Pre-Money Valuation (15 – 5 = 10m)
P * Pretransaction (fully diluted share count) (1 * 10 = 10m)
11
Q
- Post-Money Valuation
A
Similar to market cap for public companies
PMV = P * Fully Diluted Share Count (1 * 15 = 15)
PMV = Investment / proposed ownership (5m / 0,33 = 15)
12
Q
- Dividend Preference
A
Preferred get paid dividends first
13
Q
- Dividends for firms that VC buy
A
- Rarely happens, start-ups
- Must use the money to accelerate the growth
14
Q
- Accrued Cash Dividends
A
- Liquidation Dividend.
- Dividend not paid until the deemed liquidation. Wants to hold money in the company to accelerate the growth
15
Q
- Stock Dividend is called
A
Payment-in-kind (“PIK”)
16
Q
- Payment-in-kind (“PIK”)
A
- Stock Dividend
17
Q
- Employee Stock Pool
A
- Employees get shares as a incentive
- Usually call options on common stocks
- Their share gets usually lower for later rounds, as more investors come with larger sums
18
Q
- Cumulative and noncumulative Dividend rights – Difference
A
Cumulative: Dividend MUST be paid. Either at dividend date, or at a later stage. If it happens at a later stage, there might be with a simple or compounding interest rate
Non-cumulative: Does not have to pay unpaid or omitted dividend. Less attractive.
19
Q
- Deemed liquidation event
A
- Company sold
- Merged
- Shut down, etc.
20
Q
- Liquidation preference
A
- Who gets money first. Hierarchy.
1: Bondholders
2: Preferred stockholders
3: Common stockholders
21
Q
- Qualified Public Offering (QPO)
A
- Automatic conversion
- E.g., from preferred to common if OPP goes 5x today’s price
22
Q
- “Pari passo”
A
- All with preferred stocks get paid at the same time
23
Q
- 2x or 3x liquidate preference
A
- Investors are paid back double or triple their original investment before any other (juniors) get paid
24
Q
- Anti-Dilution Protection
A
- Protect the value of the investors shares in the event of a “down round”
- Protect them from dilution – from cheaper prices at a later stage
- Without this, they would get a less % ownership than they originally thought
25
Q
- Redemption Rights
A
- Feature of preferred stock that allows investor to force company to pay back the investment
- Rarely happens (?)
26
Q
- Restrictions private transactions
A
- Stocks purchased with a private transaction is restricted
- Cannot be sold to a public offering
- Must register the transaction
- Demand registration rights
- Piggyback registration rights
27
Q
- Demand Registration rights
A
- Force company to register the transactions for their shares
- Costly
- Have more influence; can demand IPO
28
Q
- Piggyback registration
A
- Register unregistered stocks
- Inferior to demand registration rights; cannot force IPO
- More common than Demand type
- Cheaper
29
Q
- Piggyback versus Demand
A
- Piggyback less costly
- Demand gives more influence and power; can demand IPO
30
Q
- Qualified Institutional Buyers (QIBs)
A
- Institutes with more than $100m investment assets
31
Q
- Vested
A
- Stocks to employees
- Usually given over time
- Incentive to work hard
32
Q
- Step Vesting
A
- Stocks to employees
- Step: Annually, Quarterly etc..
33
Q
- Cliff Vesting
A
- Stocks to employees
- All given at once
34
Q
- Transfer restrictions
A
- To prevent the founder of selling he’s shares
35
Q
- Take-me-along / Tag-along-rights
A
- Minority shareholders get the chance to join the sale of a majority shareholder
- To protect the minority shareholders
36
Q
- Right of first offer
A
- Can buy or bid on an asset before the owner tries to sell it to a third party
37
Q
- Right of first refusal
A
- Right to buy before others
38
Q
- Drag-along right
A
- Major shareholder can force minority to join a sale
- To protect the majority interest
- E.g., A owns 51% of the shares. With this clause, A can force the remaining 49% to sell their shares to an external investor
39
Q
- Offering process
A
• Two steps:
- Term sheet contains clauses to be negotiated
- Often limits E’s ability to bargain with other investors
40
Q
- Final Contract
A
• Several elements
- Baseline legal rules in any jurisdiction
- Firm’s character
- Shareholder agreements
- Employment contracts
