Venture Capital Term Sheet Negotiation — Part 12: Preemptive Rights

This post is the twelfth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.

In the prior eleven posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed dividends on preferred stock, explained how liquidation preferences work, discussed the conversion rights and features of preferred stock, examined voting rights and investor protection provisions, analyzed anti-dilution provisions, looked at anti-dilution carve-outs and “pay to play” provisions, described redemption rights, and examined registration rights,  and looked at management and information rights. In this post, we will discuss preemptive rights. [Read more...]

Is it time for the JOBS Act, Part Two?

When the JOBS Act was passed, a lot of people hoped that it would de-regulate startup finance, resulting in a boom of new startups being funded.  Through repealing the ban on general solicitation, allowing online angel investment platforms, creating the new “Regulation A+,” and allowing equity crowdfunding, the JOBS Act was supposed to make funding startups considerably easier.  But there have been some significant bumps in the road.  First, in my view, the equity crowdfunding exemption that was included in the bill was unworkable from the beginning. That continues to be true under the crowdfunding regulations proposed by the SEC and of course the SEC has yet to adopt final equity crowdfunding regulations (which means that equity crowdfunding is still largely prohibited for non-accredited investors). While the SEC finally did implement the lifting of the ban on general solicitation by creating the new Rule 506(c), it also has proposed new onerous rules governing its use (as well as the use of the existing Rule 506(b)). The SEC has proposed implementing regulations for Regulation A+, but has not adopted final regulations, which means that the exemption still cannot be used. In addition, the SEC is getting pushback from state securities regulators on the proposed Regulation A+ on the issue of preempting state registration requirements, which may result in the removal of preemption from the final regulations (which would make the exemption considerably less useful).  Furthermore, since Regulation A+ investors would be counted as shareholders for purposes of triggering reporting under the Securities Exchange Act of 1934 (the “Exchange Act”), as the proposed rules are currently written, any use of the exemption would also likely trigger expensive Exchange Act reporting requirements. [Read more...]

Venture Capital Term Sheet Negotiation — Part 11: Management and Information Rights

This post is the eleventh in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.

In the prior ten posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed dividends on preferred stock, explained how liquidation preferences work, discussed the conversion rights and features of preferred stock, examined voting rights and investor protection provisions, analyzed anti-dilution provisions, looked at anti-dilution carve-outs and “pay to play” provisions, described redemption rights, and examined registration rights. In this post, we will discuss management rights and information rights. [Read more...]

Venture Capital Term Sheet Negotiation — Part 10: Registration Rights

This post is the tenth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.

In the prior nine posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed dividends on preferred stock, explained how liquidation preferences work, discussed the conversion rights and features of preferred stock, examined voting rights and investor protection provisions, analyzed anti-dilution provisions, looked at anti-dilution carve-outs and “pay to play” provisions, and described redemption rights. In this post, we will discuss registration rights. [Read more...]

Venture Capital Term Sheet Negotiation — Part 9: Redemption Rights

This post is the ninth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.

In the prior eight posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed dividends on preferred stock, explained how liquidation preferences work, discussed the conversion rights and features of preferred stock, examined voting rights and investor protection provisions, analyzed anti-dilution provisions, and looked at anti-dilution carve-outs and “pay to play” provisions. This post will discuss redemption rights. [Read more...]