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Private Equity Financings

Down-Side Protection . Liquidation PreferenceRight of Redemption Price-based Anti-Dilution Protection. Liquidation Preference. The

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Private Equity Financings

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    1. Private Equity Financings Downside Protection: Whats Important, Whats Not & Why

    2. Down-Side Protection Liquidation Preference Right of Redemption Price-based Anti-Dilution Protection

    3. Liquidation Preference The New Standard: participating Issues: Participating vs Non-Participating Disincentivize management team, if LP too large Negotiation Ideas: Repay Preferred, then pay common, THEN share upside Balances investor protection with management incentive

    4. Liquidation Preference Negotiation Ideas contd Balance downside protection with upside benefit Different LP for M&A vs Liquidation LP subordinated to retention bonuses Fixed return for investors for greater downside protection

    5. Liquidation Preference The New Standard: Priority Issue: Priority vs Pari Passu Non-Issue: Generally, an investor issue -- potential conflict between classes, but money controls Cal. Corp. Code (903(b) - Some class protection Some protection through board/observer rights

    6. Redemption The New Standard: More common, but not standard Issues: Jeopardize company if insufficient $$ to repay Gives investors inordinate bargaining power Makes company less attractive acquisition candidate

    7. Redemption Old CW: Non-issue Push off for 5 years, which was a long time Within 5 years, company will either exit or fold Corporations code protection, if company cannot not afford redemption

    8. Redemption New CW: Issue? Longer liquidity path - 5 years is shorter Corporations code protection, but Obligation still affects companys attractiveness for merger

    9. Redemption Negotiating Points Disincentive to Management fully vest and then diminish value of shares Essentially converts equity into debt so use it to bargain on valuation Push off as far into future as possible, and redeem over time Might deter future investors whose proceeds are used to pay redemption Permit Company to delay redemption for cause Require call, if must have redemption

    10. Anti-Dilution Protection The New Standard: Weighted Average Issues: Broad vs Narrow-based Full Rachet Negotiation Points Push hard against full rachet Disincentive to additional investors See example Recommend limited rachet tied to reduction of risk (e.g., hitting milestones)

    11. Founder Vesting & Acceleration Issues: if Founder cant get liquid, valuation is secondary Negotiate V&A in context of valuation Removal by Board for convenience Acceleration on termination without cause Include Constructive Termination Double Trigger

    12. TERM SHEETS 101 Thursday, march 15, 2001 8:30am- 12:00pm Software Development Forum

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