Terms
A term that prohibits the entrepreneur from shopping around after the term sheet has been accepted
No Shop Clause
Stock that is a class of ownership that has a higher claim on assets and earnings. These shares generally have a dividend that must be paid out before dividends to other shareholders, and the shares usually do not carry voting rights.
Preferred Stock
Force a company to provide investors with financial statements and other company information
Information Rights
What are the two things VCs care about when making an investment/term sheet
Shareholders right to force the company to buy back their shares after a certain time period
Redemption Rights
Protects investors in the event a company issues equity at a lower valuation than previous rounds
Anti-Dilution
This type of stock has lower claim on assets and does not have a claim to a regular dividend. This is the stock typically held by founders and sometimes early stage investors but not always.
Common Stock
The right of a shareholder to vote on who will make up the board of directors and on matters of corporate policy, including decisions on issuing securities, initiating corporate actions and making substantial changes in operations
Voting Rights
This entitles convertible note holders to convert into equity at the lower of the valuation cap amount or the price in the subsequent financing that activates their right to convert
Valuation Cap
Terms that set up a proxy or automatic action on a shareholder to vote same as other shareholders on a particular issue
Drag Along Rights
Determines when you may exercise your stock options or when the forfeiture restrictions lapse on restricted stock
Vesting
Most common stock used in early funding for startups by Angels, family and friends
Preferred Stock
Important right to investors since they provide a contractual right for investors to demand that the company register their shares with the U.S. Securities and Exchange Commission
Registration Rights
How long is a typical termsheet good for before expiration?
One Week
The right for an investor to purchase a certain amount of shares at a predefined price for a certain number of years.
Warrants
Provisions that require existing investor(s) to invest on a pro rate basis in future rounds so as to not lose their preferential rights
Pay-to-Play
Number of shares issued at the reduced priced is considered in repricing of the previous round
Weighted Average
Gives the investor the right to sell its shares on the same terms as the founders/early investors -usually on a pro-rata basis of its total ownership percentage in relation to the total sale
Right of Co-sale
Events that must take place or tasks that must be completed before the transaction the agreement provides for can be consummated.
Closing Conditions
Rights held by preferred shareholders to vote on certain important matters pertaining to the company
Protective Provisions
Investor either gets liquidation preference or stock converts into common shares
Non-Participating Liquidation Preferences
Includes common stock outstanding and all others shares that could be converted options, rights and securities (including employee options)
Broad-based
Contractual right of an entity to be given the opportunity to enter into a business transaction with a person or company before anyone else can
Right of First Refusal
(Adj) Dividing something up among shareholders in the same proportions as their shareholdings in the company
(Noun) Almost always refers to a shareholder’s proportion of a new share issuance
Pro Rata
If a majority shareholder sells his or her stake, then the minority shareholder has the right to join or in the same transaction and sell his or her minority stake
Tag Along Rights