Financing Term Sheet Deep Dive: Rights of First Refusal and Co-Sale

Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.  

In this series we’ll look to shed some light on the legal language contained in that term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both Company and Investor.  Check out an overview here.

Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at rhoeg@hoeglaw.com.

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In this, the second to last post in our “Financing Term Sheet Deep Dive” series, we turn to the concepts of “First Refusal” and “Co-Sale”; two related ideas designed to limit changes to a Company’s capital structure after a financing has been concluded.

While both concepts are complicated enough to require their own definitive document as part of a closing (a “Right of First Refusal and Co-Sale Agreement”), they are simple enough to be summarized in the NVCA model term sheet in only one paragraph.

Let’s take a look at the model language.

Continue reading “Financing Term Sheet Deep Dive: Rights of First Refusal and Co-Sale”

Financing Term Sheet Deep Dive: Participation Rights

Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.  

In this series we’ll look to shed some light on the legal language contained in that term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both Company and Investor.  Check out an overview here.

Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at rhoeg@hoeglaw.com.

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As we get closer to the end of our “Financing Term Sheet Deep Dive” Series (only a few weeks left!) the rights and responsibilities at issue are generally less contentious.  That doesn’t mean that they aren’t important, or that they don’t affect the Company and its Investors.  It does mean, however, that the contours of the rights are a bit more “expected”; that there is, perhaps, a bit less to negotiate.

Today we discuss one of those “less contentious” rights: the right to “participate” in future equity sales of the Company.

Let’s take a closer look.

Continue reading “Financing Term Sheet Deep Dive: Participation Rights”

Financing Term Sheet Deep Dive: Registration Rights

Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.  

In this series we’ll look to shed some light on the legal language contained in that term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both Company and Investor.  Check out an overview here.

Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at rhoeg@hoeglaw.com.

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Last week when discussing redemption rights, I equated them to a sword hanging over the Company’s head.  That’s because the right of an Investor to redeem his or her investment is not usually actionable.  The Company simply isn’t likely to have the funds to pay back.  The key to the term is the “leverage” given to the Investors, not the right itself.

Today we discuss another Investor “leverage” term:  Registration Rights.

Continue reading “Financing Term Sheet Deep Dive: Registration Rights”

Financing Term Sheet Deep Dive: Redemption Rights

Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.  

In this series we’ll look to shed some light on the legal language contained in that term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both Company and Investor.  Check out an overview here.

Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at rhoeg@hoeglaw.com.

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Earlier in this series when we initially discussed the concept of dividends, we equated the idea to that of lenders receiving interest payments on the “loan” they made to the company.  In that context, “Redemption Rights” are the rights held by a company’s investors to call that “loan”; to force the company to buy them out.

While redemption rights are rarely, if ever used by the Investors that hold them, like so many rights that we have discussed in this series (and will discuss in the future), they are important because they set the playing field for future discussions.

In other words, they establish leverage; the nature of which you can see indicated in the header image to this post.

Continue reading “Financing Term Sheet Deep Dive: Redemption Rights”

Financing Term Sheet Deep Dive: Anti-Dilution

Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.  

In this series we’ll look to shed some light on the legal language contained in that term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both Company and Investor.  Check out an overview here.

Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at rhoeg@hoeglaw.com.

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Last week, in discussing the right of Investors to convert their preferred stock into common, we touched on the concept of “anti-dilution” provisions intended to alter the number of shares that the preferred stock might convert into.

Today, we take a deeper look at this complicated concept.

Continue reading “Financing Term Sheet Deep Dive: Anti-Dilution”

Financing Term Sheet Deep Dive: Conversion

Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.  

In this series we’ll look to shed some light on the legal language contained in that term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both Company and Investor.  Check out an overview here.

Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at rhoeg@hoeglaw.com.

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In our earlier discussions on the rights and privileges set out in a financing term sheet (including our discussions regarding voting rights, dividends, and liquidation preferences), we’ve noted that the phrase “on an as converted basis” or “as converted” has been used in the model terms to describe the full capitalization of the Company.

But what is this “conversion”?  How does it work?  And how does it affect the rights and privileges of the Investors and their securities?

The answer is fundamental to the nature of preferred equity offerings.

Continue reading “Financing Term Sheet Deep Dive: Conversion”

Financing Term Sheet Deep Dive: Protective Provisions

Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.  

In this series we’ll look to shed some light on the legal language contained in that term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both Company and Investor.  Check out an overview here.

Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at rhoeg@hoeglaw.com.

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Last week, we discussed one of the primary governance rights given by a Company to its Investors: board representation. This week, we talk about the other primary governance right: “protective provisions”.

Under most state laws, a corporation (or an LLC) cannot take certain significant actions without getting the approval (or “consent”) of the holders of the company’s equity. Generally, this right is held by a majority in interest of all such holders.

The term “protective provisions” is a fancy way of saying (in legalese) that in addition to getting majority approval, the Company must also get the approval of a set percentage of the Investor class in order to take certain of these actions.  In other words, the Investors are “protected” from the Company’s doing certain things without their having agreed.

Continue reading “Financing Term Sheet Deep Dive: Protective Provisions”