Between venture capitalists, angel investors and equity crowdfunding, more and more channels of funding are becoming available for your startup. To enter into these meetings with confidence, entrepreneurs must be prepared and armed with basic startup terminology.
In this issue of the Flash, we are defining five key terms every entrepreneur should be familiar with before meeting with investors. For more key terms, please check out our Deal Dictionary which is designed to help entrepreneurs understand the jargon that comes up in discussions with investors and legal counsel.
This is a constitutional document for the company (but subordinate to the certificate of incorporation) and generally sets out the procedural rules that govern the company. Bylaws typically regulate the rules and procedures of director elections, board and stockholder meetings, officer appointments and their roles and responsibilities, and similar matters.
#2 Change of Control
This generally occurs when a company is acquired by or merged into another entity, or when a majority of the voting power of the company changes hands.
#3 Full Ratchet
This is a form of a price-based Anti-dilution Provision that is most aggressive (in favor of the investors) in balancing against the dilution caused by the issuance of stock at a price lower than existing preferred stock. It adjusts the conversion ratio of the existing preferred stock (that was sold for more than the stock being sold now) so that such stock retains the same percentage on an as-converted basis as it did before the issuance.
#4 No Shop Provision
A provision in term sheets that prohibits the company that is being invested in from shopping the deal around to other investors. Also referred to as an "exclusivity" provision. Depending on deal dynamics and who has leverage, the No Shop typically ranges from 30-45 days, and occasionally, a No Shop is not included in the term sheet.
#5 Warrant Coverage Amount
In some financing deals involving convertible Promissory Notes, investors will ask for warrants exercisable for shares of a series of the company's preferred stock (or if none exist, then shares of the next series of preferred stock to be issued by the company or common stock). The number of shares the warrant is exercisable for will usually be expressed as a percentage of the amount of the investment (i.e. the principal amount of a Promissory Note) divided by the exercise price (the purchase price) of the underlying stock.
Also in this week’s Flash: