Term sheets: control terms and others Flashcards
Protective provision
Veto rights that investors have over certain company decisions, specifically related to their economic position
Drag along agreement
A provision that forces a shareholder to have their shares voted by a certain investor or class of investors. The two common types are where holders of preferred stock drag along the common in the event of a sale, or when a founders stock is dragged along by all other types if they leave the company
Redemption rights
A provision that allows the investor to sell their shares back to the customer for a guaranteed return. Good for protection when a company becomes a viable business, but not bug enough for a big return (although these companies often don’t have the money to pay out the rights), or when an investment is made late in the life of a fund.
Adverse change redemption
A provision that gives an investor the right to redemption in the case of a “material change” to the business. “Material” is too broad a term, and so the provision should be rejected.
Conditions precedent to financing
Essentially preconditions to a deal, allowing the VC to back out if not met. usually that legal fees get paid regardless, governing law be set to a specific domicile and the company can’t shop the deal once the term sheet is signed
Approval by investor’s partnerships
A condition precedent to financing that means the deal has not been approved by the investors who issued the term sheet. This might still be the case even if it is not explicitly in the term sheet
Rights offering to be completed by the company
A condition precedent to financing that means previous investors will be offered the chance to participate in the current financing
Employment agreements signed by founders as acceptable to investors
A condition precedent to financing that outlines various conditions the founders agree to, such as compensation and what happens if they are fired
Information rights
The information a VC is entitled to, and the time frame in which the company is required to deliver
Registration rights
The rights investors have for registering their shares in an IPO scenario, and the obligation a company has to the VCs whenever they file additional registration statements after the IPO. Generally not worth much energy.
Right of first refusal
The rights an investor has to buy shares in a future financing. Also known as a ‘pro rata right’. The threshold that defines a ‘major investor’ can be outlined here. Also watch out for is a potential multiple on the purchase rights - also known as ‘super pro rata’ and seen as an excessive ask.
Voting rights
Defines how preferred and common stock relates to each other in the context of a share vote. Doesn’t matter much.
Restriction on sales
Also known as the ‘right of first refusal on sales of common stock’ or ROFR, defines the parameters around selling shares when the company is a private company.
Proprietary information and inventions agreement
Used to ensure the company stands behind the representation that it owns its IP. Ensures a company owns what its employees built. Good for the company and investors
Co-sale agreement
If a founder sells shares, the investors are given the chance to sell a proportional amount
