Term Sheet Provisions
Beginning on Monday, December 3, 2012, members of Financial Industry Regulatory Authority (FINRA) must file a copy of any private placement memorandum, term sheet, or other offering document used within 15 calendar days from the date the sale took place; the filer will have a continuing obligation to file any materially amended versions of the offering documents; if no offering documents are used, it must indicate that it did not do so; and filings must be made electronically with FINRA through the… Read the rest
Mergers and Acquisitions
Yahoo and Alibaba Close Deal
Yahoo has agreed to sell back half of its interest in the Chinese Internet company Alibaba. In 2005 Yahoo acquired a 40% interest in the company, but since then relations between the two companies have become strained, especially as Yahoo failed to meet investors’ expectations. As part of an agreement reached earlier this year, Yahoo will sell another 10% of its Alibaba holdings back to the company when the company files an IPO, and the rest of its Alibaba holdings after the IPO. Yahoo’s remaining interest in Alibaba is valued at… Read the rest
This is the final installment in our key term sheet provisions series. This post reviews rights of first refusal, restrictions on sales, voting rights, proprietary information and inventions agreements, co-sale agreements, founders activities, no shop agreements, and indemnification provisions.
Right of First Refusal
The right of first refusal provision grants investors a right to participate in subsequent stock offerings. This right is sometimes called a pro rata right, because it enables investors to participate pro-rata. Pro rata means proportional, and in this context means that an investor can purchase an amount… Read the rest
Today, we’re continuing our series on key term sheet provisions by discussing registration rights.
What Are Registration Rights?
Before you understand registration rights, you should familiarize yourself with registration statements. Form S-1 is the registration statement companies file with the SEC to become a publicly traded company. If you want to see what a completed S-1 looks like, you can check out Facebook’s registration statement here.
Registration rights define the rights of investors to cause the company to file a registration… Read the rest
Today we’re continuing our key term sheet provisions series by taking a look at information rights. I almost skipped over this provision because information rights are ubiquitous and relatively unimportant. But before you agree to any terms you should understand their ramifications, even if your lawyer says they’re relatively unimportant. So in the interest of thoroughness, here are a few words on information rights:
What are information rights?
Information rights grant shareholders, including investors, the right to receive specific company records typically including, among other records, audited annual financial statements, unaudited quarterly statements and… Read the rest
This week in our series on key term sheet provisions, we’re taking a look at conditions precedent to financing. In order to understand conditions precedent to financing, you have to remember that the term sheet itself is non-binding. The conditions precedent to financing detail events that have to occur before the term sheet will become binding.
What Are Typical Conditions Precedent to Financing?
There is typically a clause that states the funding is conditioned on the investors completing due diligence, and being happy with what they find. This condition gives… Read the rest
Today we’ll continue our series on key term sheet provisions by discussing redemption rights.
What Are Redemption Rights?
Redemption rights provisions give investors a future right to have stock repurchased at the original purchase price plus declared and unpaid dividends. The provision can be drafted to provide for mandatory redemption or redemption at the investor’s option.
Generally the right doesn’t mature for at least 5 years, and the redemption payments are spread out over multiple years.
A recent survey indicates that Read the rest
Continuing our series on key term sheet provisions, this week we will be taking a look at dividends.
What Are Dividends?
Dividends are distributions of company cash (or stock) to shareholders, and are most typically issued by mature companies. It is very rare for start ups and emerging companies to have extra cash to give back to shareholders. Dividends are only issued if authorized by the board of directors, and directors have nearly complete discretion in determining if and when they opt to distribute company cash to shareholders rather than opt to reinvest… Read the rest
In this post in our key term sheet provisions series, we’re discussing conversion rights.
Optional Conversion
Investors’ preferred stock is always subject to an optional conversion into common stock. That is, they can convert their preferred shares into common shares at any time. This is a standard provision that will be found in 99.9% of all term sheets; it’s one of the few terms that are actually nonnegotiable. The conversion is usually on a 1:1 basis, which tends to undervalue preferred shares as they have additional features which make them “preferred” to common stock.… Read the rest
After a holiday break last week, we’re back to our regularly scheduled Friday term sheet provision discussions. Today we’re taking a look at drag along agreements.
What is a drag along agreement?
Drag along agreements are term sheet provisions which allow a subset of investors to force all other stockholders, including the founders of a company, to consent to a sale of the company. Usually these provisions allow for a majority of preferred stockholders to force the sale, even if a majority of common stockholders oppose the transaction. These provisions generally come into… Read the rest
