Anatomy of a Term Sheet: Conversion and Anti-dilution
In this post we look at when an investor’s preferred stock may or must convert to common stock, and how the conversion ratio may be adjusted in certain circumstances.
Anatomy of a Term Sheet: Voting Rights and Protective Provisions
Voting Rights and Protective Provisions define when investors vote with the other stockholders and when they have the right to a separate vote. Having separate voting rights in certain circumstances is important to investors because it prevents them from being outvoted by other stockholders with competing interests. The circumstances in which investors have the right to a separate vote will typically include
Anatomy of a Term Sheet: Liquidation Preference
We continue our discussion of the Charter provisions with the liquidation preference, which is the most important economic term in the term sheet after the valuation because it establishes the relative rights of the investors and the common stockholders with respect to assets available for distribution when the company winds up its business.
Anatomy of a Term Sheet: Dividends
Dividend provisions are often overlooked by entrepreneurs, but can have a significant effect on the economics of a financing. The model term sheet includes two alternative dividend provisions, one providing that dividends will be paid only when also paid to the common stock (company favorable), and the other providing for “accruing” dividends on the preferred stock (investor favorable).
Anatomy of a Term Sheet: Nature of a Term Sheet and Summary of Offering Terms
The introductory paragraph in the NVCA’s model term sheet is important because it makes clear that, for the most part, the term sheet does not create any legally binding obligations. Entrepreneurs must recognize that a term sheet is an agreement to try to reach an agreement, and therefore only a steppingstone (albeit an important one) on the path to financing.
Anatomy of a Term Sheet: Overview
A key milestone in the lifecycle of many successful companies (and, admittedly, many unsuccessful companies) is obtaining financing from angel or venture capital investors, but in negotiating with experienced investors entrepreneurs are usually at a distinct disadvantage because they are unfamiliar with standard terms. While we strongly suggest entrepreneurs consult their lawyers rather than negotiate [...]
Keep track of your stock!
Startups often play fast and loose with equity; promising a small piece of the company to anybody who helps out, but never going through the legal process necessary to actually issue shares or the administrative exercise of maintaining proper stock ownership records. Failing to do either can lead to big problems if a dispute arises [...]
Authorized Shares v. Issued Shares
The terms “authorized shares” (or “authorized capital”) and “issued shares” are often confused, but the distinction is very important. Authorized shares refers to the number of shares of stock the corporation’s charter permits the corporation to issue. Issued shares refers to shares the corporation has actually sold or granted to someone. Shares that are authorized [...]
Common Contract Terms: Indemnification
If you own your own business, sooner or later you’ll encounter a contract with legal terms that will send you scrambling for a dictionary (or a lawyer). We can’t rid the world of legalese (believe it or not, there’s often a good reason for it), but we can try to make reading legal documents a [...]
Price-based antidilution protection
Price-based antidilution protection reduces the dilutive effect on an investor of a later financing at a lower valuation (a “down-round” financing). Price-based antidilution protection of some sort is a characteristic of most preferred stock and operates by increasing the number of shares of common stock into which a share of preferred stock converts (i.e. it [...]