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DOWNROUND TERM SHEETS
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Priority Rather Than Pari Passu. Participation With Common Stock. II. Transaction Terms ... Priority Rather Than Pari Passu. Cumulative vs. Noncumulative ... – PowerPoint PPT presentation
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Title: DOWNROUND TERM SHEETS
1
DOWN-ROUND TERM SHEETS
- What to Negotiate and What to Accept
- Jon R. Summers
- White Lee LLP
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- Rules of Term Sheet Negotiation
- II. Transaction Terms
- Valuation
- Liquidation Preference
- Price-Based Antidilution
- Redemption Rights
- Dividends
- Registration Rights
- Protective Provisions and Voting
- Information Rights
- III. Protections For The Company Management
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I. Rules Of Term Sheet Negotiation
- Pushback Requires Leverage
- Leverage requires viable alternatives (real or
perceived) - Company Success Requires Management Drive, and
Management Drive Decreases as Terms Become More
Onerous - Relative Bargaining Power Based on Many Factors,
Including Management Experience, Stage of
Financing, Competitive Landscape, Milestone
Achievement, etc. - Later stage terms are generally more onerous
because the Founders may be gone - Earlier stage companies that need future
financing have some leverage because investors
dont want future rounds to impose onerous terms
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II. Transaction Terms
- Valuation
- Pre-Money Value Below Last Rounds Value
- Triggers Antidilution Provisions from the Prior
Round (but usually negotiated away) - May Cause Employee Discomfort Due to Impact High
Option Strike Prices - Warrant Coverage Sometimes Necessary to Induce
Investment - Option Pool Refills Required
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II. Transaction Terms
- Liquidation Preference
- Multiples up to 4x
- High Potential for Management Disincentive
- Management Bonus Pool
- Priority Rather Than Pari Passu
- Participation With Common Stock
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II. Transaction Terms
- Price-Based Antidilution
- Formula Full Ratchet vs. Weighted Average
- Limited Ratchet
- Carve-Outs More Limited
- Company Needs the Ability to Operate Strategically
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II. Transaction Terms
- Redemption Rights
- Ability to Redeem Down to 3 Years from 5 Years
- Mandatory vs. Option
- Mandatory Liability Which Impairs Ability to
Get Debt Financing - Redemption Prices 1x Plus up to 25 Return
- Corporate Law Limits Ability to Redeem to
Historical Retained Earnings - In Reality, Redemption Rarely Available When
Investors Want It
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II. Transaction Terms
- Dividends
- Priority Rather Than Pari Passu
- Cumulative vs. Noncumulative
- Cumulative Liability
- Registration Rights
- Up to 3 Demand Registrations
- Rarely is One Used
- Company Pays S-3 Expenses
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II. Transaction Terms
- Protective Provisions and Voting
- Special Voting or Approval Requirements for
Transactions Outside the Ordinary Course of
Business - Hampers Companys Ability to Operate
- Separate Class/Series Voting
- Costly and a Headache to Get A Majority of Each
Series/Class
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II. Transaction Terms
- Information Rights
- Monthly Financials
- Veto Power Over Budgets
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Protections For TheCompany Management
- Use Performance Goals. Adjust Terms if Goals Are
Met Options/Incentives if Goals Are Met - Accelerate Management Vesting if Goals Are Met
- Pay to Play
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