PE: covenants and preferred stocks contractual schemes

Question 1

What are the 2 popular covenants (mandatory behaviours) included in PE contracts?

Answer 1

1. Tag along clause: the enterpreneur finds a third party to which he sells his equity stake, the clause allows the PE investor to sell his stake at the same price
2. Drag along clause: The VC finds a third party interested to buy his stale; the clause forces the enterpreneur to sell at the same price if the buyer want to acquire all the shares.

Question 2

What are the three types of securities different from common shares that are used to protect the interests of investors?

Answer 2

1. Preferred stocks:
   - Allows investors to be paid before the reimbursement of common stock ccan take place
2. Convertible Preferred stocks (CPS)
   - Convertible preferred shareholders have the option to:
3. Convert their shares into common stocks
4. To be paid before the common shareholders receive reimbursement
   - The conversion depends on the value of the firm paid by the acquiror
5. Redeemable preferred stocks (RPS)
   - The security is very simple: the investor receives the value of its original investment (3 mil euros); the extra value is split according to the equity participation of the enterpreneur and of the PE investor
   - For very high selling values, the VC will get a remarkable amoutn of money, For this reason RPS are linked to: 1) mandatory conversion into common stock; 2) a given cap to the maximum value that the PE could get