Anatomy of a Term Sheet: Drag Along
A Drag Along provision compels a group of stockholders to vote in favor of a transaction approved by another group of stockholders and/or the company’s Board of Directors.
Anatomy of a Term Sheet: Election of the Board of Directors
The Board plays a pivotal role in the management of a company because it overseas the company’s officers (and has the power to replace them) and because Board approval is required for many corporate actions, including any action that materially impacts the corporation’s business. Not surprisingly, then, the composition of a company’s Board can be a contentious point of negotiation in a financing.
Anatomy of a Term Sheet: Right of First Refusal, Right of Co-Sale and Lock-Up
The rights and restrictions set forth in the Right of First Refusal and Co-Sale Agreement are the Right of First Refusal and Right of Co-Sale, both of which apply to any proposed sale of stock by stockholders prior to the company’s initial public offering, and the Lock-up, which applies to sales by the common stockholders following the company’s initial public offering.
Anatomy of a Term Sheet: Misc. Investor Protective Provisions
We finish up our discussion of the Investor Rights Agreement with a quick overview of several provisions, which typically are not the subject of much negotiation.
Anatomy of a Term Sheet: Right to Maintain Proportionate Ownership (a/k/a Preemptive Rights)
The “Right to Maintain Proportionate Ownership” is more commonly referred to as “Preemptive Rights” or the “Right of First Offer.” Preemptive Rights give investors the first right to purchase shares offered for sale by the corporation in the future, subject to a few exceptions.
Anatomy of a Term Sheet: Management Rights and Investor Director Approval
Management and Information Rights serve to ensure that even those investors who will not have the right to appoint a member of the Company’s Board of Directors are able to obtain certain information about the operation and finances of the company.
Anatomy of a Term Sheet: Registration Rights
Registration Rights give investors the right to have the company register their shares with the Securities and Exchange Commission, which is a prerequisite to selling shares in the public markets. There are three types of registration rights typically granted to investors.
Anatomy of a Term Sheet: Stock Purchase Agreement
The Stock Purchase Agreement is the contract wherein the investors agree to buy the shares of stock the company is offering to sell. The importance of the SPA, however, lies is in the terms and conditions it places on the financing, which serve primarily to protect the investors.
Anatomy of a Term Sheet: Redemption Rights
Redemption Rights provisions entitle investors to require the company to repurchase all of the outstanding shares of stock held by the investors at a certain point in the future.
Anatomy of a Term Sheet: Pay-to-Play
The Pay-to-Play provision can have significant economic impact on the investors and the company. A Pay-to-Play provision provides that any investor failing to fully exercise her “Preemptive Rights” to participate in a future financing will have some or all of her shares of preferred stock converted into common stock or into another class of preferred stock with lesser rights.