Archive for the ‘Mergers and Acquisitions’ Category

Preparing for Due Diligence for the Sale of a Company

Executives who have not led a sale or merger of a company before are often caught off-guard by how much work goes into due diligence. For many who are successful, the building of the business crescendos and culminates in a sale. The term sheet is signed, you smell the money, and perhaps even book your post-closing vacation, but you may not realize that you’ve just signed up to run a muddy obstacle course race while also running your business. Your next several weeks, maybe months, will be consumed by responding to page after page of information and document requests from your potential acquirer. You will be questioned about all aspects of the business. Because you want to keep the pending transaction under the radar and limit the impact on your business if the deal does not go through, you assemble the smallest employee team possible to help you with the transaction. You may find yourself requesting files and summaries from various employees in the guise of another business need, copying after hours, and arranging off-site meetings with the acquiror.

To preserve some of your sanity during an M&A transaction, there are steps that you can take in advance to prepare for due diligence.

What Makes Your Business An Attractive Acquisition Target

The documents and information that will be of greatest interest to an acquiror depend on the reasons the acquiror wants to buy your company. Is the acquiror primarily interested in your proprietary technology? Your customer base? Your shared supply needs? Your distribution network? Your skilled labor force? Assess your assets, the competition, and the market to determine what makes your business an attractive target. Understanding this will help you identify which documents and information buyers will scrutinize and therefore require the greatest attention.

Financial Acquisition

You might conclude that an acquiror would be purchasing your business mainly for financial reasons, such as to increase revenue via your key customers, take advantage of your distribution network, or combine purchasing power from suppliers. In that case, you should make sure your key customer, distributor, and supplier contracts are current, signed, and complete, and that they are assignable upon a change in ownership. Determine whether you have obtained and are keeping up-to-date the necessary permits and licenses. Limit the exclusivity or non-compete arrangements with global distribution and supply partners that may impede an acquiror’s business. Your financial statements should also be in good order, audited (if possible), and GAAP-compliant, as the acquiror will likely want to confirm the amount of revenue, profit margin, cost of goods, and other key financial drivers.

Intellectual Property Acquisition

If the main attraction of your business is the intellectual property behind it, then you will want to pay particular attention to your IP portfolio. Figure out which of the IP assets are the likely to be most appealing to buyers and have them thoroughly analyzed to make sure they are properly protected, including perhaps securing IP monitoring services to find other parties who may be infringing. Make sure you have an updated, complete list of all of your IP assets and that a docketing process is in place to ensure that necessary renewals and other filings are timely made. Verify that you have invention assignments from all employees and consultants who have contributed to your technology. Implement physical, technical, and administrative safeguards of your IP and other confidential information. Determine whether there are any existing or potential infringement IP claims that you will need to disclose or that can be addressed beforehand.

Core Records of Every Business

In addition to the documentation relating to your key assets, acquirors or their counsel will examine certain core documents that apply to almost any business.  These include, among other things, records relating to incorporation/organization, minutes, stock or other ownership interests, employees, loans, facilities, contracts, disputes, regulatory compliance, and tax filings. With all of these, it’s helpful for your team to get in the habit of maintaining organized files, entering key data into tracking tools, and developing processes to monitor details and meet deadlines. As you deal with the crisis of the day, it’s easy to let organization slip, but the devil’s in the details. During the due diligence stage of a deal is not the time to find out that you are missing signed invention assignment agreements, did not finish papering that stock redemption when so-and-so left, or have not been properly filing tax returns and corporate qualifications in other states.

Preparing in Advance for Due Diligence

These just scratch the surface of what you will be required to gather or prepare and provide. Once you get into house-cleaning mode, you will see other documents and information that need to be organized. Going through this exercise uncovers many matters that require follow-up. Better to tie loose ends when going about “business as usual” instead of scrambling to meet a due diligence deadline.

Establishing good record-keeping habits early or at least well in advance of a transaction will help keep momentum as you work toward the closing, reduce the chances that any skeletons in the closet will become bargaining chips for the acquirer, and preserve some of your sanity.

November 1st, 2011 by Macy Stoneback | Permalink | No Comments


Finders under Fire

Small businesses often have challenges with raising capital from investors.  Gaining access to equity capital can be difficult and complying with a myriad of rules and regulations when seeking help in raising funds can be very confusing.  When raising equity capital, many entrepreneurs seek assistance from unlicensed “finders” for introductions to potential investors. Recent government enforcement actions and commentary from regulatory agencies, however, emphasize some of the risks associated with working with unlicensed finders.

So . . . What do Finders Find?

Generally, finders make introductions between investors and companies, but do not actually sell securities or close transactions on behalf of the companies selling the securities.  If a finder is providing anything more than a simple introduction or access to contact information, or is receiving a fee based on the completion of a transaction, then the finder needs to be licensed as a broker-dealer.

Finders are generally not allowed to pitch for the company, develop deal terms, or negotiate for or represent the company, unless they are licensed as broker-dealers.  Both state and federal law require anyone who is involved in the business of selling securities to be licensed.  If a company uses the services of an unlicensed finder when a broker-dealer license is required, then (1) the company may be at risk for civil and criminal penalties; (2) the investors may be able to rescind their investment transaction and demand their money back; and (3) the company’s ability to raise capital in the future may be limited. If the management of a company desires to have someone help develop deal terms for them, have someone pitch for or with them, and receive compensation for those or similar services based on a successful capital raise, then the company will likely have to engage a licensed broker-dealer.

Regulation of Broker-Dealers and Finders

The regulation of broker-dealers was instituted under state and federal law to protect potential investors from abusive and misleading sales practices.  Broker-dealers are required to conduct a reasonable investigation into both the securities that they offer and the issuers of the securities.  They also are required to evaluate whether the securities are suitable for the investors purchasing them. By categorizing finders as broker-dealers, regulators are attempting to prevent them from engaging in the abusive and misleading sales practices that securities regulations are intended to curtail.

There is no specific “finder’s license” issued by the U.S. Securities and Exchange Commission (SEC), and obtaining a state and federal securities license to become a broker-dealer is a significant burden; moreover, most of the requirements to obtain the license has little to do with what finders actually do.  Most finders are well-connected people who only occasionally make introductions of companies to potential investors, so taking securities exams, meeting ongoing securities-related educational requirements, and being subject to the oversight and monitoring of a broker-dealer’s compliance department is generally not worth the hassle to them.

Recent Developments: Finders under Fire

Over the past few years, the SEC and state securities regulators have been more aggressively enforcing restrictions on the activities of unlicensed finders. On May 17, 2010, the SEC denied a request from a law firm seeking a “no-action letter” related to the law firm’s proposed introductions of a client to individuals who “may have an interest” in investing in the client, where the law firm would receive a small percentage of the investments made as a result of the introductions.  In its response, the SEC stated that “transaction-based compensation” is a “hallmark of broker-dealer activity” and that “any person receiving transaction-based compensation in connection with another person’s purchase or sale of securities typically must register as a broker-dealer or be an associated person of a registered broker-dealer.”  Additionally, the SEC stated that a finder who is introducing people who may be interested in buying securities would likely be both “pre-screening potential investors to determine their eligibility” to purchase the securities, and “pre-selling securities” to gauge the investors’ interest. The SEC concluded that compensation tied to successful investments would give the law firm a “salesman’s stake,” triggering the need for broker-dealer registration.

Cash-strapped states have also taken the approach of aggressively seeking civil and criminal penalties against unlicensed finders.  For example, a prominent national law firm acting as a finder was recently required to pay a $550,000 penalty for making introductions and arranging for meetings between a state pension fund’s representatives and one of the firm’s clients seeking investment from the pension funds.  Despite the fact that no investment was ever made, the state’s attorney general prosecuted the firm on the grounds that some of the firm’s attorneys were engaging in the marketing of securities without proper licenses.  State pension funds and other disgruntled investors are also using rescission rights under securities laws to force the return of money invested in unprofitable funds when unlicensed finders were used to assist with the transactions.

The increased legal prosecution of unlicensed finders means that fewer individuals are willing to provide critical introductions to potential investors. The actions by securities regulators reduce the ability of small businesses to raise capital at a time when capital is in short supply. The development of a “finder’s license,” with requirements that are narrowly tailored to the services that finders provide, might help resolve the issues facing finders and smaller companies, but a narrow license for finders is not the direction that state and federal agencies are currently heading towards.

The Difficulty of Using Broker-Dealers for Small Capital Raises

Instead of using a finder, a company seeking investment may want to try to find a licensed securities broker-dealer.   However, there are very few licensed broker-dealers that provide services related to offerings below $5,000,000 in value.  The potential risks and relatively modest compensation related to small offerings leaves little incentive for licensed broker-dealers to act as finders for those offerings.  Sometimes, however, broker-dealers are willing to assist companies with these smaller raises if they believe that a much larger raise is in the company’s future or that it will increase the likelihood of the broker-dealer being engaged in connection with the sale of the company.

To view a listing of registered broker-dealers, along with each broker-dealer’s history of disputes with customers and regulatory and legal problems, the Financial Industry Regulatory Authority (FINRA) offers on its website the free FINRA BrokerCheck®.

December 31st, 2010 by Matt Storms and Paul Page | Permalink | No Comments


Paul Page Joins the AlphaTech Counsel Team

I am pleased to announce that Paul Page recently joined AlphaTech Counsel, S.C. I am excited about this change and wanted to share a little about Paul.

Paul combines a science, business, and IT background with large law firm experience as a corporate lawyer. He is a great fit at AlphaTech as not only is he an excellent practitioner, he understands the needs of emerging companies and is well-versed in helping entrepreneurs to balance important legal and business issues.

Paul has quickly stepped in and is already actively working with clients and using a number of our automated systems. I am genuinely thrilled about Paul coming on board. Here is more information about Paul:

October 1st, 2010 by Matt Storms | Permalink | No Comments


Changing Your Choice of Entity: Cross-Species Mergers and Conversions

With increasing frequency, companies are considering a change in their form of entity.  The reasons for the change vary considerably: sometimes companies are underwhelmed by the tax benefits of being a limited liability company and are overwhelmed by its complexities (international tax withholding issues, multi-state K-1’s, profits interests management, phantom income, and employee education regarding equity-based incentives), while other times companies are frustrated by the restrictions on S corporations and desire the flexibility that limited liability companies afford.  In other cases still, institutional investors may require a certain form of entity (e.g., a C corporation), while other investors (e.g., active angel investors) are looking to take advantage of pass through losses. 

Today, most states make it fairly easy to change the type of entity or even to change the state of organization of the entity.  It is important to keep in mind though that while the mechanics of converting to a new entity from a legal perspective are not typically too complex, the related tax issues can be incredibly intricate, especially for an organization with a long operating history and a complex capitalization structure.  While in many situations converting to a different type of entity will be tax-free, that will not always be the case.  Your tax advisor and accountants should be consulted early in the process when considering a change in entity form.  Assuming a change in structure is justified and the tax issues are manageable, this article focuses on the mechanics of converting from one type of entity to another.  

While there are variations among the states, there are generally two ways to change your type of entity from a legal perspective: merging with and into another entity of a different type and effectuating a conversion.  The method selected, as well as some of the finer details associated with the particular method selected, is often driven by tax considerations.

Change of Entity Form Through Merger

The more traditional way to change the form of an organization is through a merger.  Sometimes people refer to this as a cross-species merger.  A merger enables two or more entities to combine into a single entity.  The surviving entity can be recently created just to effectuate the change in entity form or it can have an operating history. The surviving entity typically files with the applicable state a plan of merger and a statement that the plan was approved in accordance with applicable law.  In most states, the plan of merger identifies the parties to the merger, the surviving entity, and the manner and basis of converting equity interests in each entity into interests in the surviving entity.  The plan of merger also includes any applicable amendments to governing documents (e.g., articles) for the surviving entity.  

After the merger, only the surviving entity continues to exist and it is responsible for all liabilities of each business entity that is a party to the merger.  Subject to certain exceptions and filing requirements, title to assets automatically vests with the surviving business entity.

Change of Entity Form Through Conversion

Within the last decade, most states have adopted statutes that allow organizations to convert their form of entity by just filing the applicable conversion documentation.  For example, in Wisconsin, a business that desires to convert to another type of legal entity must submit to the Department of Financial Institutions a certificate of conversion with a plan of conversion and a statement that the plan was approved in accordance with the laws applicable to the pre-converted entity. 

Similar to a plan of merger, most states require that a plan of conversion include the name, form of business entity and jurisdiction governing the entity both before and after the conversion.  In addition, the post-conversion articles of incorporation or other charter document is an attachment to the plan of conversion.  Some states however require a separate filing for the charter document.  Like with a plan of merger, the plan of conversion must also include the terms and conditions of the conversion and the manner and basis of converting the ownership interests in the old entity to the ownership interests in the new entity. 

Upon conversion, the new entity continues to be subject to the liabilities incurred prior to the conversion.  If a business owner had any personal liability by reason of the owner’s position in the entity (such as the general partner of a limited partnership), such liability will continue, but only to the extent accrued prior to the conversion.  The new entity continues to be vested with title to all its properties, subject to modest exceptions and certain filing requirements.  Any legal proceeding pending against the old entity will be continued against the new entity.  

Conducting Due Diligence When Changing Your Form of Entity

Despite the fact that the legal filing requirements for cross-species mergers and conversions are rather straight forward and mechanical, there are a number of due diligence issues that should be considered prior to making the change in entity form.  For example, in contracts, a merger is sometimes treated as an assignment of a contract from one entity to another and many contracts prohibit such assignments without prior consent.  Businesses should review all their material contracts and consider seeking consent for assignment where necessary.  Trademark and patent filings in the U.S. Patent and Trademark Office (USPTO) will need to be updated to reflect new company names in a conversion.  Mergers are treated as an assignment that also needs to be recorded with the USPTO.  Likewise, regulatory approvals, permits and licenses may need to be updated.  Because a conversion, rather than a merger, involves only a single entity, many consider that general contract anti-assignment provisions do not apply to conversions unless conversions are specifically addressed and prohibited.  In either case, however, there is frequently a company name change that may need to be reflected on a variety of documents. 

In addition to third party contracts and government filings and licenses, there are a number of organizational documents that may need to be created as a result of the merger or conversion.  For example, if an entity changes from a limited liability company to a corporation, many of the provisions from the organization’s operating agreement prior to the cross-species merger or conversion will be incorporated into a combination of the new corporation’s bylaws and perhaps a separate shareholders agreement, investor rights agreement or voting agreement.  Some of these organizational-related documents can be adopted wholesale with no or modest changes.  Others, however, will need considerable changes or even termination because of statutory requirements, efficiency, or custom.  


While it would be convenient to have all the facts up front prior to choosing an entity’s form when creating it, even the most diligent and seasoned entrepreneurs experience change in facts or laws that necessitate changing the organization’s form of entity.  With proper planning and involvement of your attorney and accountant, the process of converting your form of entity is usually manageable.  In the end, like with most things, the decision often becomes a cost-benefit analysis.

January 8th, 2010 by Sara Jensen and Matt Storms | Permalink | 1 Comment


Convergence of the Needs of Biotech and Pharma

The next 12-24 months should be interesting in the biotech/pharmaceutical arena.  We have the large pharmaceutical companies (such as Abbott, AstraZeneca, Bristoll-Meyers Squibb, Eli Lilly, GlaxoSmithKline, J&J, Merck, Novartis, Pfizer, Roche, Sanofi, and Schering-Plough) sitting on a lot of cash.  Yet, despite all that money in the bank, the number of high profile drugs coming off patent soon from large pharma is substantial.  According to Merck’s industry numbers, drugs coming off U.S. patent in 2011 alone will cause a loss of over $51.1 billion in revenues in 2011.  The following year does not look much better with another $42.9 billion in less revenue from drugs coming off patent in 2012.  Looked at another way, 85% of the top large pharma products will lose U.S. patent protection by 2012.

So where will large pharma go to replace these lost revenue streams?  While acquisitions of large biotech companies (market caps between $5-50 billion) will likely be a partial solution, it is far from a complete solution.  

Where will the Next Blockbuster Drugs Come From?

One set of clues to the answer may be to examine where the large blockbuster drugs came from in the last decade.  Not surprising to many in the industry, the overwhelming majority of top-selling drugs were developed by companies that were different than the companies commercializing them.  According to Merck’s figures of the blockbuster drugs from the last decade,

  • 60% of innovator small molecules,
  • 82% of innovator biologics,
  • 65% of follow on small molecules, and
  • 62% of follow on biologics

were originated in a company other than the company commercializing it.  This trend seems like it will continue.  With the various numbers I have seen, the revenues from the pipeline of new drugs from large pharma is expected to be less than one third of the anticipated revenues from drugs coming off patent. 

Cash Strapped Biotech

On the other end of the spectrum, we have a number of smaller biotech companies that are very short on cash and have a number of products in the pipeline.  In the Spring of this year, it was noted by many sources that more than 1/3 of the public biotech companies had less than six months of cash left to operate.  For privately held biotech companies, the news is similarly bleak with the tight venture capital markets.  While the number of small deals, PIPEs, and mergers and acquisitions of biotech firms have picked up some in the last month or two, absent an unanticipated opening of the public markets and significant increases in venture capital or PIPEs, the day of reckoning for many biotechs is coming soon. 

Unless of course, large pharma goes on an investment or buying spree in an effort to make up their anticipated lost revenues.

September 21st, 2009 by Matt Storms | Permalink | 1 Comment


Venture Capital and Mergers and Acquisitions Glossary

Below is a glossary for venture capital and merger and acquisition transactions. Users are encouraged to submit additional words for inclusion and suggestions for improved definitions. Once updating starts, the most up to date version of the glossary will be maintained at this link: Current Venture Capital and Merger and Acquisition Glossary.

Accredited investor

A person or entity that meets certain requirements under the federal securities laws for investment purposes. For example, a natural person is an accredited investor if he or she has a net worth (with spouse) that exceeds $1 million at the time of the purchase of securities, or has income either individually that exceeds $200,000 in each of the two most recent years or jointly with spouse that exceeds $300,000 for the two most recent years.

Angel investor

A wealthy individual (accredited investor) who provides seed or early-stage financing from his or her own funds in return for equity. Angel investors sometimes provide industry knowledge and contacts and sometimes play a direct role on the board, but infrequently participate in management. Angels invest either as individuals or in groups.

Anti-dilution provisions

An adjustment mechanism for preferred stock, options, or convertible securities that provides the holder the right to receive additional securities in the event of a future financing in which securities are sold at a lower price than originally paid by the holder of the right. Typically, anti-dilution provisions come in two types: full ratchet and weighted average. There are typically exceptions for the adjustment mechanism that carve out situations such as the issuance of certain employee options or existing convertible securities.

Assignment of inventions agreement

An agreement that states who owns the rights to intellectual property that is developed. An assignment of inventions agreement typically makes clear that an entity owns the relevant intellectual property developed by its employees, contractors, and agents.

Blank check preferred stock

Unissued class of preferred stock of a company, the terms and conditions of which (such as liquidation, voting, dividend, and conversion rights) may be expressly determined by the company’s board of directors without further shareholder approval. An issuer will typically use blank check preferred stock to simplify the process of creating new series of preferred stock to raise additional funds from sophisticated investors without obtaining additional shareholder approval.

Bridge financing

Interim financing used to meet a short-term, cash-flow need until more permanent financing (typically larger amounts) is secured. For example, bridge financing can be used to carry a firm to an initial public offering, a venture round of financing, or long-term debt.

Burn rate

The rate at which a company that is not profitable uses available cash to cover expenses that exceed revenues; the figure is usually expressed in monthly terms, as in a $100,000/month burn rate.

Business issue

An area that is traditionally negotiated between the clients, rather than attorneys (or in some cases, an area that one or both lawyers don’t want to negotiate for whatever reason).

Call right

A right that enables one person (or the issuer) to purchase securities held by another, usually at a fixed price and after a specified date or the occurrence of a certain event.


The combined sources of equity capital, consisting of convertible debt, common stock, and preferred stock.

Cap table

Short for capitalization table, it is a summary of a company’s issued and outstanding securities.

Common stock

A type of security representing the residual ownership rights of a corporation. Usually, company founders, management, employees, and some angel investors own common stock, while other investors own preferred stock. In the event of a liquidation of a corporation, the claims of secured and unsecured creditors, debt holders and holders of preferred stock take precedence over holders of common stock.

Convertible debt

A debt instrument (such as a promissory note) that can be converted to equity of the issuer (either as common stock or preferred stock).

Co-sale or tag-along rights

These rights enable the holder to participate in a sale of stock from another shareholder to a third party, typically in proportion to the number of shares the holder holds in the company. Co-sale rights are usually designed and intended to protect the holder if a founder or a majority shareholder decides to sell his, her, or its interest in the company. The co-sale rights holder can participate in the sale, usually on the same terms and conditions as the founder or majority shareholder.


A contractual obligation to do or not do something in the future. For example, an affirmative covenant could be to provide quarterly reports to investors and a negative covenant could be to not enter into another financing without enabling existing investors to participate.

Cram-down financing

A financing that results in significant dilution of non-participating existing shareholders, usually reducing the value of the inon-participating existing shareholders’ original investments or the rights held by such non-participating existing shareholders.

Cumulative dividends

Dividends that accrue when unpaid and must be paid out before dividends are paid to subordinate classes of stock.

Deal flow

The amount of potential investments that an investor reviews in a given period of time.

Demand registration rights

Rights that enable a holder to demand that the company register the stock held by such holder under the Securities Act of 1933 in order to enable the holder to sell the stock in the public market without restriction.


The reduction in the ownership percentage of shareholders caused by the issuance of new securities or the conversion of convertible securities of the issuer, typically with the connotation that the new securities are issued at a lower price than that paid in the previous round of financing.

Discounted cash flow

A valuation method in which the present value is calculated of anticipated future company cash flows.


Payment made by a company to the owners of one or more of its types of securities.

Down round

A financing in which the new securities are issued at a lower price than the previous round of financing.

Drag-along rights

Rights that enable a shareholder or group of shareholders (usually those who own a controlling interest in the company) to compel other shareholders to sell their stock in the event a purchaser desires to purchase more than what the controlling shareholder(s) own(s).

Due diligence

A prudent and proper investigatory process to assess a company and the viability of a potential transaction.

Earn out

An arrangement in which sellers of a business may receive additional future payments if certain financial performance metrics are met.

Exit strategy

The method or plan for enabling shareholders to sell their shares and earn a return on investment. Typically, it refers to either the sale of the company or a public offering.


A person who participates in the creation of a company.

Founders’ stock

Nominally priced common stock issued to founders, officers, employees, directors, and consultants at or around the time a company is formed.

Full-ratchet, anti-dilution protection

Rights that enable investors to reduce the share price at which they can convert their earlier investment or debt to the lower price per share that the company subsequently sells or issues its securities.

Fully diluted basis

The total number of shares of common stock issued by a company, assuming all warrants, options and other rights are exercised and all preferred stock and other convertible securities are converted to common stock.

Initial Public Offering (or IPO)

The first registered offering of securities to the public that is in compliance with the Securities and Exchange Commission requirements.

Inside round

A round of financing in which the investors are the same or a subset of investors that invested in a previous round.

Institutional investor

Large, licensed entities that invest capital on behalf of companies or individuals.

Investment banker

A firm that raises capital, trades in securities, or facilities or brokers mergers and acquisitions (or a combination of some or all of the above).


Refers to the company that issued or sold its securities.

Joint venture

An agreement or understanding between two or more companies in which the companies work together for a particular business undertaking.

Lead investor

The investor who manages the negotiation, documentation, and closing of a round of financing, and typically makes the largest investment in such round.

Liquidation preference

The amount of assets holders of preferred stock are entitled to prior to any distribution of assets to holders of common stock upon a liquidation event, such as the dissolution or sale of the company. The preference amount is often based on the original purchase price paid by the holders of preferred stock, or a multiple thereof (e.g., a 2x liquidation preference).

Living dead

Refers to investors who go through a few down rounds of financing, are unwilling or unable to invest any more, and for whose interests in the company there is no liquidation event on the horizon. When the term is applied to a company, it means that the company continues to operate, even though the company is insolvent or has little chance of thriving.

Lock-up provision

A contractual requirement that for a period of time (such as 180 days) a shareholder is restricted from selling such shareholder’s securities following a public offering.

Mezzanine financing

Typically a hybrid of debt and equity financing that is used to finance the expansion of an existing company. It is generally subordinated to debt provided by senior lenders, such as banks

No-shop requirement

A contractual requirement that prevents a company from soliciting or negotiating other deals for a specified period of time, while it is exclusively negotiating with a potential investor, group of investors, or acquiror.

Outstanding stock

Shares of stock that have been issued and are not held by the issuer

Participation right

A right that enables the holder to purchase the holder’s pro-rata percentage of the company’s equity securities in future rounds, enabling the holder to maintain his, her or its percentage ownership in the company.

Participating preferred stock

Preferred stock that entitles the holder not only to holder’s stated liquidation preference, but also allows the holder to participate in liquidating distributions to holders of common stock after the initial liquidation preference is distributed to the holders of preferred stock.

Payment in-kind dividends

A dividend paid in equity rather than cash.

Pari passu

A Latin term referring to the equal treatment of two or more parties in an agreement. For example, an investor may want to have a certain right that is pari passu with investors in a previous financing round.


A requirement that in order retain a right, the holder must do or pay something in the future. In the venture capital context, if a holder of preferred stock desires to maintain certain rights as a preferred stockholder, he, she, or it must participate and invest pro rata in future financings or lose those rights.

Piggyback registration right

A right that enables an investor to force an issuer to register the investor’s previously issued, but unregistered shares of the issuer in the event the issuer decides to register some of its other securities.

Placement agent

An individual or firm that assists with identifying investors to purchase securities.

Portfolio company

A company that has received an investment from a venture capital fund is said to be a portfolio company of that venture capital fund.

Post-money valuation

The value of a company after investors invest in a given round of financing.

Pre-emptive right

The right of an existing shareholder to purchase such shareholder’s pro rata share of any new stock that is being issued by the company prior to that stock being offered to new investors. Pre-emptive rights are similar to participation rights.

Pre-money valuation

The value of a company before investors invest in a given round of financing.

Preferred stock

Stock that gives its holders certain rights, preferences, and privileges over holders of common stock and other securities.

Private placement memorandum (PPM) or offering memorandum

A document explaining the details of an investment opportunity related to the sale of unregistered securities to potential investors.

Put right

A right that enables the holder to force the company or another investor to purchase the holder’s securities, usually for a prior agreed upon price, after a specified date or the occurrence of a specified event.

Qualified public offering (QPO)

A public offering that meets certain requirements, as agreed between investors and an issuer, such as a minimum amount or a specified return for holders of preferred stock.

Reg D or Regulation D

Refers to certain alternative rules promulgated by the Securities and Exchange Commission that enable an issuer to sell its securities with certain restrictions, without registering them, to a limited number of people, most or all of whom must meet certain standards of sophistication or wealth (see “accredited investor”). Each rule under Reg D has different requirements, such as those relating to the size of the offering, the number of investors, and the types of required disclosures.

Redeemable preferred

Preferred stock that can be redeemed by its holder in exchange for a prior agreed upon price.

Rights offering

An offering of securities only to current shareholders of an issuer.

Road Show

A series of presentations made in several cities to potential investors.

Securities and Exchange Commission (or SEC)

The federal agency that is in charge of enforcing the federal securities laws and regulating the securities industry (including the stock exchanges).

Stripped down preferred

A type of preferred stock that carries only the very basic rights of preferred stock (e.g., a liquidation preference), but does not carry the variety of other rights (contractual or otherwise) frequently associated with the issuance of preferred stock.


A group of investors that participate in a round of financing or a group of investment banks that participate in a public offering.

Term sheet

A document that outlines the key terms of a proposed transaction. The term sheet is typically non-binding, except for certain provisions.

Underwater option

An option is underwater when the current fair market value of the underlying shares is less than the option exercise price to purchase those shares.

Veto rights

Negotiated rights that enable the holder to prevent a company from taking certain actions or cause it to take certain actions.


A derivative security that gives the holder the right to purchase securities (usually common stock) from the issuer at a specific price within a certain time frame.

Weighted average anti-dilution protection

Adjusts the investor’s conversion price downward based on a weighted average formula reflecting the number of new shares sold and the new price per share at which the additional shares were issued. It can be a narrow-based, weighted average or a broad-based, weighted average. Compare to full-ratchet anti-dilution protection.

July 28th, 2009 by Matt Storms | Permalink | No Comments