Term Sheet Template - National Venture Capital Association (Page 18 of 25) in pdf

$[______] of Series A Preferred.

Termination:

Earlier of [3-5] years after IPO, upon a Deemed Liquidation Event,

or when all shares of an Investor are eligible to be sold without

restriction under Rule 144(k) within any 90-day period.

[Except for pari passu registration rights granted in connection with

debt financing], no future registration rights may be granted without

consent of the holders of a [majority] of the Registrable Securities

unless subordinate to the Investor’s rights.

Management and Information

[A Management Rights letter from the Company, in a form

Rights:

reasonably acceptable to the Investors, will be delivered prior to

Closing to each Investor that requests one. ]

Any Major Investor [(who is not a competitor)] will be granted

access to Company facilities and personnel during normal business

hours and with reasonable advance notification. The Company will

deliver to such Major Investor (i) annual, quarterly, [and monthly]

financial statements; (ii) thirty days prior to the end of each fiscal

year, a comprehensive operating budget forecasting the Company’s

revenues, expenses, and cash position on a month-to-month basis for

During the offering and aftermarket periods, the underwriters do not want other stockholders to sell

shares in competition with the underwriters, both because more available shares will sop up demand for the registrant’s

shares and because the increased supply will depress the aftermarket price of the shares. Accordingly, the underwriters

will require other holders of shares, whose shares are not included in the public offering but who may be able to sell

pursuant to SEC Rule 144, to agree not to sell during the offering period and an appropriate aftermarket period. A 180-

day period for an IPO is customary.

Shareholders are generally reluctant to agree to do this because it eliminates their liquidity during the

lock-up period; this reluctance is tempered, however, by their desire for a successful initial public offering with

aftermarket prices exceeding the public offering price.

This provision commits the Investors to agree to the underwriters’ demands only if other stockholders do

so as well. The underwriters generally want shares owned by officers, directors and “large” stockholders to be subject

to the lock-up arrangements, but are not concerned if small amounts of shares are free to sell. However, the definition

of a “large” stockholding is subject to some negotiation. The underwriters do not want sales of shares in the open

market after the deal over which they have no control to affect the market price of the stock in (or "overhang") the

market. Venture Investors may simply not want anyone else to be able to sell if they cannot.

Given the expense and general hassle of the securities registration process, the Company wants the

commitment to engage in the process to lapse as soon as possible, while the Investors want the maximum liquidity

period possible. The principle of this provision is that no stockholder is entitled to require the Company to register the

sale of shares if the registration is unnecessary since the stockholder can just as easily sell under Rule 144(k) (and for a

lower commission).

Since the size of a public offering is determined by market conditions, it is possible that selling

shareholders may seek to sell more shares than the offering can accommodate. In this case, the underwriters will “cut

back” the shares to be sold by the selling stockholders. See “Piggyback Registration” previously discussed. The

problem for the Investors is simply that the more shares eligible to be registered, the greater the cutback would be. To

solve this problem, the Investors do not want the eligibility pool to be increased without their consent.

See commentary in introduction to NVCA model Managements Rights Letter, explaining purpose of such

letter.

ABA Comments to NVCA Term Sheet - Final Version.DOC

Term Sheet Template - National Venture Capital Association Page 18

Related Articles

Related forms

Related Categories