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投资协议条款清单（Term Sheet）-强卖权
Term Sheet: Drag Along
This is one of those terms that has recently increased in importance to VCs due to the all the financing and exit dynamics that occurred during the downturn of 2001 – 2003.A typical drag-along agreement is short and sweet and looks as follows:
“Drag-Along Agreement: The [holders of the Common Stock] or [Founders] and Series A Preferred shall enter into a drag-along agreement whereby if a majority of the holders of Series A Preferred agree to a sale or liquidation of the Company, the holders of the remaining Series A Preferred and Common Stock shall consent to and raise no objections to such sale.”
As transactions started occurring that were at or below the preferred liquidation preferences, entrepreneurs and founders – not surprisingly – started to resist doing these transactions since they often weren't getting anything in the deal.While there are several mechanisms to addre sharing consideration below the liquidation preferences(e.g.the “carve out”-which we'll talk more extensively about some other time), the fundamental iue is that if a transaction occurs below the liquidation preferences, it's likely that some or all of the VCs are losing money on the transaction.The VC point of view on this varies widely(and is often dependent on the situation)– some VCs can deal with this and are happy to provide some consideration to management to get a deal done;others are stubborn in their view that since they lost money, management shouldn't receive anything.However, in all of these situations, the VCs would much rather control their ability to compel other shareholders to support the transaction being considered.As more of these situations appeared, the major holders of common stock(even when they were in the minority of ownership)began refusing to vote for the proposed transaction unle the holders of preferred waived part of their liquidation preferences in favor of the common.Needle to say, this “hold out technique” did not go over well in the venture community and, as a result, the drag-along became more prevalent.I've heard founders and early shareholders say a variety of things with regard to a drag-along, but the most inane is “it's not fair – I want to be able to vote my stock however I want to.”Remember that this term is one of a basket of terms that are part of an overall negotiation aociated with injecting money into your company.There are
tradeoffs in any negotiation and nothing is standard – so “fair” is an irrelevant concept – if you don't like the terms, don't do the deal.If you are faced with a drag-along, your ownership position will determine whether or not this is a relevant iue for you.An M&A transaction does not require unanimous consent of shareholders(these rules vary by jurisdiction, although the two most common situations are either majority of each cla(California)or majority of all shares on an as converted basis(Delaware)), although most acquirers will want 85% to 90% of
shareholders to consent to a transaction.So – if you own 1% of a company, while the VCs would like you to sign up to a drag-along, it doesn't matter that much(unle there are 30 of you that own 1%.)Again – make sure you know what you are fighting for in the negotiation – don't put disproportionate energy against terms that don't matter.When a company is faced with a drag along in a VC financing proposal, the most common compromise position is to try to get the drag along to pertain to following the majority of the common stock, not the preferred.This way – if you own common – you are only dragged along when a majority of the common consents to the transaction.This is a graceful position for a very small investor to take(e.g.I'll play ball if a majority of the common plays ball)and one that I've always been willing to take when I've owned common in a company(e.g.I'm not going to stand in the way of something a majority of folks that have rights equal to me want to do.)Of course, preferred investors can always convert some of their holding to common to generate a majority, but this also results in a benefit to the common as it lowers the overall liquidation preference.投资协议条款清单（Term Sheet）-购买参与权
Term Sheet: Pay-to-Play
At the turn of the century, a pay-to-play provision was rarely seen.After the bubble burst in 2001, it became ubiquitous.Interesting, this is a term that most companies and their investors can agree on if they approach it from the right perspective.In a pay-to-play provision, an investor must keep “paying”(participating pro ratably in future financings)in order to keep “playing”(not have his preferred stock converted to common stock)in the company.Sample language follows:
“Pay-to-Play: In the event of a Qualified Financing(as defined below), shares of Series A Preferred held by any Investor which is offered the right to participate but does not participate fully in such financing by purchasing at least its pro rata portion as calculated above under ”Right of First Refusal“ below will be converted into Common Stock.[(Version 2, which is not quite as aggreive): If any holder of Series
A Preferred Stock fails to participate in the next Qualified Financing,(as defined below), on a pro rata basis(according to its total equity ownership immediately before such financing)of their Series A Preferred investment, then such holder will have the Series A Preferred Stock it owns converted into Common Stock of the Company.If such holder
participates in the next Qualified Financing but not to the full extent of its pro rata share, then only a percentage of its Series A Preferred Stock will be converted into Common Stock(under the same terms as in the preceding sentence), with such percentage being equal to the percent of its pro rata contribution that it failed to contribute.]
A Qualified Financing is the next round of financing after the Series A financing by the Company that is approved by the Board of Directors who determine in good faith that such portion must be purchased pro rata among the stockholders of the Company subject to this provision.Such
determination will be made regardle of whether the price is higher or lower than any series of Preferred Stock.When determining the number of shares held by an Investor or whether this ”Pay-to-Play“ provision has been satisfied, all shares held by or
purchased in the Qualified Financing by affiliated investment funds shall be aggregated.An Investor shall be entitled to aign its rights to participate in this financing and future financings to its affiliated funds and to investors in the Investor and/or its affiliated funds, including funds which are not current stockholders of the Company.”We believe this is good for the company and its investors as it causes the investors “stand up” and agree to support the company during its lifecycle at the time of the investment.If they do not, the stock they have is converted from preferred to common and they lose the rights aociated with the preferred stock.When our co-investors push back on this term, we ask: “Why? Are you not going to fund the company in the future if other investors agree to?” Remember, this is not a lifetime guarantee
of investment, rather if other prior investors decide to invest in future rounds in the company, there will be a strong incentive for all of the prior investors to invest or subject themselves to total or partial conversion of their holdings to common stock.A pay-to-play term insures that all the investors agree in advance to the “rules of engagement” concerning participating in future financings.The pay-to-play provision impacts the economics of the deal by reducing liquidation preferences for the non-participating investors.It also impacts the control of the deal, as it reshuffles the future preferred shareholder base by insuring only the committed investors continue to have preferred stock(and the corresponding rights).When companies are doing well, the pay-to-play provision is often waived, as a new investor wants to take a large part of the new round.This is a good problem for a company to have, as it typically means there is an up-round financing, existing investors can help drive company-friendly terms in the new round, and the investor syndicate increases in strength by virtue of new capital(and – presumably – another helpful co-investor)in the deal.
