Term Sheet

Every now and then I run into a new VC term in a term sheet that I’ve never seen before. My legs tremble with excitement as I stare at the words to dissect what they mean. On Friday, a long time friend sent me the following new and exciting term. Compelled Sale Right: So long as VC (together with its permitted transferees) continues to hold at least 10% of the outstanding common shares (on an as-converted basis), and so long as an IPO has not been completed, then, at any time from and after the seventh anniversary of the transaction, if VC or the Company shall receive a bona fide offer from an unaffiliated third party to purchase 100% of the equity of the Company, VC shall have the right to cause each other stockholder to sell such stockholder’s equity securities on the same terms and conditions applicable to VC. ...

As Jason and I close out our Letter of Intent series, we thought we’d cover one last item that has screwed many a seller – the case where a public company acquires a private company for unregistered stock. Some buyers will try to ignore this – a good seller should work hard up front to get agreement on what type of stock and what kind of registration rights they will be receiving. Expectation setting is key in this situation. ...

While watching the Sopranos tonight, I saw the magic manilla envelope stuffed with cash get passed to Tony and thought “what would a good deal be without some fees?” Remember – it is important to make sure that the lawyers and bankers can afford their fancy sports cars. A letter of intent will usually be explicit about who pays for which costs and what limits exist for the seller to run up transaction costs in the merger. The transaction cost associated with an agent or banker, the legal bill, and any other seller-side costs are typically included in the transaction fee section. While it’s conceivable that the buyer will punt on worrying about who covers transaction fees, in today’s M&A world most savvy buyers are very focused on making sure the seller ends up eating these, especially if they are meaningful amounts. ...

Since it’s a Saturday morning, I thought I’d cover a topic in our Letter of Intent series that my wife Amy would never agree to. Signing a letter of intent starts a serious and expensive process – for both the buyer and seller – as you both work to consumate a deal. As a result, you should expect that a buyer will insist on a no shop provision similar to the one that we discussed in our term sheet series. In the case of an acquisition, no shop provisions are almost always unilateral, especially if you are dealing with an acquisitive buyer. ...

When you are asked “Hi – it’s been fun to date. Will you marry me?” you usually don’t expect the person asking the question to say “Oh – and it’ll only happen if my mother says it is ok.” (although I expect this happens occasionally, especially if the person asking hasn’t had enough therapy.) Buyers are like this and will normally include certain conditions to closing in the LOI. These can be generic phrases such as “Subject to Board approval by Acquirer,” “Subject to the Company not having a material adverse change,” or “Subject to due diligence and agreement on definitive documents.” They can also be phrases that are specific to the situation of the seller such as “Subject to the Company settling outstanding copyright litigation,” or “Subject to Company liquidating its foreign subsidiaries.” We generally don’t get too concerned about this provision, because any of these “outs” are very easy to trigger should the buyer decide that they don’t want to do the deal. ...

As my body recovers from my recent marathon, my brain turns back to Letters of Intent. Jason and I left you hanging for a while in our Letter of Intent series – we plan to tromp to the finish line in the next few weeks. In an effort to mix metaphors, while Jack Bauer tries to always look out for other people at CTU (except for say – in Ryan Chappelle’s case), it’s not always true that management is playing the same role in an acquisition. In public company acquisitions, you often hear about egregious cases of senior management looking out for themselves (and their board members helping them line their pockets) at the expense of shareholders. This can also happen in acquisitions of private companies, where the buyer knows he needs the senior executives to stick around and is willing to pay something extra for it. Of course, the opposite can happen as well, where the consideration in an acquisition is slim and the investors try to grab all the nickels for themselves, leaving management with little to nothing. ...

It’s been a while since Jason and I wrote an entry for our Letter of Intent series. Yesterday, as I read through a confidentiality agreement that I had been asked to sign, I was inspired to address another typical part of an LOI – the dreaded confidentiality / non-disclosure agreement. While venture capitalists will almost never sign these in the context of an investment, they are almost always mandatory in an M&A transaction. If the deal falls apart and ultimately doesn’t happen, both parties (the seller and the buyer) are left in a position where they have sensitive information regarding the other. Furthermore, it’s typically one of the only legally binding provisions in a LOI (along with choice of law and break up fees.) Everything else is dependent upon the deal closing. If the deal closes, this provision largely becomes irrelevant since – well – the buyer now owns the seller. ...

Tim Wolters has written a post on anti-dilution clauses from an entrepreneurs point of view . Tim promises to write more on other terms like liquidation preferences, reverse vesting, dividends, class voting rights, “and any other terms that have bitten [him] on the ass before.” Tim is co-founder and CTO of Collective Intellect, a new company that just recently closed a Series A funding. He was previously the co-founder and CTO of Dante Group, a company I funded that was acquired by webMethods. Expect straight talk and some good insights from Tim.

Jason and I continue our Letter of Intent series with one of our “favorite” clauses (sarcasm intended). The escrow is another hotly negotiated term that often is left ambiguous in the LOI. The escrow (also known as a “holdback”) is money that the buyer is going to hang on to for some period of time to satisfy any “issues” that come up post financing that are not disclosed in the purchase agreement. ...

Well – the first business day of the year is officially over. Apparently Yahoo just rejected an offer from Microsoft for $80 billion because it wasn’t enough. My guess is that Microsoft forgot to include the “!” in Yahoo! and pissed someone off (the “!” has got to be worth at least $20 billion.) I felt like shit all day today, but my cold (the first one I’ve had this year) at least had a side effect of getting me out of a trip. ...