Advanced Private Equity Term Sheets and Series A Documents

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Joseph W. Bartlett , Ross Barrett, Mike Butler, the VC Experts, Inc. Editorial Board

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“If you have a desire to understand from top to bottom the terms of a private equity transaction and why each term/clause/section is negotiated in or out of a deal, then you should purchase this book. In short, it is an excellent desk companion for any private equity professional.”
—Paul J. Marino, Visionaries: The Young Venture Capital Society Newsletter

Succeeding in the venture capital industry requires knowledge of the terrain and a keen understanding of the terms essential to a well-structured transaction. This encyclopedic guide is packed with state-of-the-art analysis, forms and commentary, all designed to help you master the most crucial stages of the venture financing process.

The Advanced Private Equity Term Sheets and Series A Documents book with a CD examines all of the deal terms you may encounter—anti-dilution protection, warrant coverage, liquidation preferences, and others. It provides clause-by-clause discussion of the Stock Purchase Agreement, along with time saving tools, such as model documents, opinion letters and a due diligence checklist contributed by a Big 4 accounting firm. You'll also get the most current data from an industry-wide survey of West Coast and East Coast deal terms and trends, so you'll know whether a given provision is “market” or “industry standard”—a must before your next negotiation. Whether you are dealing with claw back provisions or “next round financing”, cram downs or the “overhang problem”, this definitive book brings you the in-depth, nuanced answers you need to achieve your objectives.

Book #00673; loose leaf with a CD, one volume, 1,416 pages; published in 2003, updated as needed; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN: 978-1-58852-120-0

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  • Brand: Law Journal Press
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  • Page Count: 1416
  • ISBN: 978-1-58852-120-0
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  • Joseph W. Bartlett

Joseph W. Bartlett is special counsel in theCorporate, Securities and Financial Institutions practice at McCarter &English LLP. A recognized pioneer of the national private equity and venturecapital bar, Mr. Bartlett contributed to the original models for private equityand fund of fund partnerships. His experience extends to alternativeinvestments, venture capital, emerging companies, corporate restructurings,private equity and buyouts. Mr. Bartlett’s practice includes serving as counselto asset managers, including those of major public and private equity funds,with a focus on technology companies, and he has also served as trustee of aseries of public mutual funds and chair of a public REIT. His venture fund workbegan with the first Greylock fund, and he has drafted documents for several ofthe largest and most successful LBO funds.

Mr. Bartlett has served as Presidentof the Boston Bar Association and as General Counsel and Undersecretary of theU.S. Department of Commerce. He has authored numerous treatises, including Leveraged Buyouts, Compensation Structures for Venture Backed Companies, Equity Finance, Fundamentals of Venture Capital, and Venture Capital: Law, Business Strategies and Investment Planning.He is also founder and chairman of VC Experts, for which he is an activecontributing editor. Mr. Bartlett is a frequent speaker on industry issues andlectures as a faculty member at Cornell’s Johnson School of Business.

Also by Joseph W. Bartlett :
Leveraged Buyouts

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  • Ross Barrett
Ross Barrett is the Co-founder of VC Experts and a General Partner of Seven Funds (formerly BVM Capital), which is the management company for venture funds Louisiana Ventures, LP and Themelios Ventures, LP. As a Co-founder and President of VC Experts, Inc. he is active in the strategic direction of the company, in particular in the private market and predictive analytics analysis area.
Previously, he worked on Capitol Hill as a legislative aide to senior U.S. Senator J. Bennett Johnston, where he specialized in risk assessment and regulatory reform. Ross has an LLM in Taxation from NYU, a JD from Louisiana State University and a BA from Southern Methodist University. He has been an adviser to or investor in over twenty early-stage privately held companies.

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  • Mike Butler
Mike Butler is a graduate of NYU School of Law, is with TPG-Axon Capital, and was formerly an associate at Ropes and Gray LLP (New York) specializing in private equity transactions, venture capital fund formation and taxation issues related to corporate securities.

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  • the VC Experts, Inc. Editorial Board
VC is the leading online information and training venue for lawyers, investors and business involved in private equity and venture capital.

Introduction to Series A Financing: Glossary of Terms

§ 1.01 Introduction to Venture Capital
§ 1.02 Glossary of Terms

Model Term Sheets

§ 2.01 The Term Sheet
[1] Model Term Sheet: Series A Preferred Stock
[2] Model Exclusive Dealing Provisions
[3] [Reserved]
[4] Binding Obligations Inadvertently Created by the Term Sheet
[5] No Such Thing as Boilerplate
§ 2.02 Counsel’s Conflicting Roles in Drafting Term Sheets
§ 2.03 “Play or Pay”
[1] The Return of “Play or Pay”
[2] Dealing with the Holdout Who Won’t Pay or Play
[3] The Benchmark Case
§ 2.04 [Reserved]
§ 2.05 Valuation: Model Resolutions of Special Meeting of the Board of Directors Establishing Fair Market

Series A Round Definitive Documents

§ 3.01 Model Stock Purchase Agreement
[1] Representation and Warranties
[2] Material Adverse Change
[3] Environmental Representations
[4] Covenants
[5] Time Limits
[6] Baskets and Thresholds
[7-8] Hart-Scott-Rodino
[9] Schedule of Exceptions
[10] Disclosure Schedule
[11] An Efficient Solution for Multiple Closings
§ 3.02 Model Subscription Agreement, Convertible Preferred Stock
[1] Subscription Agreement
[2] Subordinated Convertible Promissory Note
§ 3.03 Model Stockholders Agreement
[1] Controlling Shareholder and/or Director Liability
[2] Model First Refusal Agreement
[3] Limiting Rights of First Refusal and
Information Rights to “Major Investors”
§ 3.04 Model Common Stock Warrant
[1] Warrant Anti-Dilution In Case of a Down Round
§ 3.05 [Reserved]
§ 3.06 Sample Opinion Of Issuer’s Counsel
[1] Note on Opinion of Issuer’s Counsel
§ 3.07 Series A Convertible Preferred: Model Certificate of Designation
[1] Preferred Dividend PIK Feature
[2] Participating Preferred and Variations
[3] Conversion Rights
[4] Exception to Definition of Dilutive Issuance
[5] Full Ratchet and Weighted Average
[6] Internal Revenue Code § 305
[7] Exploding Preferred, Redeemable at the Option of the Holder
[8] Broad-Based Weighted Average
§ 3.07A Confidentiality Agreement (Short Form)
§ 3.07B Non-Disclosure Agreements
[1] Non-Disclosure Agreements in Venture Capital Transactions
[2] Non-Disclosure Agreement: Venture Capital Fund and Prospective Portfolio Investment
[3] Model Non-Disclosure Agreement (Alternate Form)
§ 3.07C Model Indemnification Agreement (Compact Model Form)
[1] Introduction
[2] Model Indemnification Agreement
§ 3.08 Model LLC Agreement
[1] Model LLC Agreement: Long Form
[2] To “LLC” or Not to “LLC”: That is the Question
[3] Model LLC Agreement: Alternative Form
[4] Second Amended Model LLC Agreement: Long Form
§ 3.09 Full Ratchet, Weighted Average, Broad-Based Calculations
[1] Weighted Average Anti-Dilution
[2] Narrow-Based v. Broad-Based Weighted Average Anti- Dilution

General Partner Issues and Documentation

§ 3A.01 General Partner: LLC Agreement
§ 3A.02 Model LLC Agreement for Advisers Fund
§ 3A.03 The General Partnership Vehicle as an LLC
§ 3A.04 Placement Fees as Organizational Expenses
§ 3A.05 Side Letters and Special Treatment of Limited Partners
[1] Shortened Time for Redemption
[2] Side Deals
[3] Issues of Transparency
[4] Self-Imposed Restrictions
[5] Defaulting Partners
[6] Unanswered Questions
§ 3A.06 Co-Investment Rights for LPs: Sample Side Letter
§ 3A.07 [Reserved]
§ 3A.08 Limited Partner’s Right to Obtain Access to Identities of Other Limited Partners
[1] Background
[2] The Court’s Analysis
[3] Conclusion
§ 3A.09 Model Side Letter with State Pension Plan Trustee
§ 3A.10 Inadequate PPM Disclosure
§ 3A.11 Mandatory Registration
[1] Registration of Finders
[2] Business Brokers Not Required to Register as Brokers
[3] SEC’s Warning to Unregistered Finders

Fiduciary Duties of Controlling Shareholders in Down- Rounds

§ 4.01 Common Down-Round Characteristics
[1] Lowered Valuation
[2] Staggered Financing
[3] Increased Liquidation Preferences
[4] Participating Preferred Stock
[5] Anti-Dilution Provisions
[6] Redemption Rights
[7] Dividends
[8] Protective Provisions
[9] Directors and Management
§ 4.02 Venture Financing and the Concept of Fiduciary Duty
§ 4.03 The Burnout Transaction Illustrated
§ 4.04 Multiple Series of Securities
§ 4.05 Fiduciary Duty in Corporate Governance: Public Corporations
[1] Competitive Bids
[2] Fairness Opinions
[3] The Special Committee of Disinterested Directors
§ 4.06 Fiduciary Duty in the Close Corporation Context
[1] Duty of Care: Delaware Directors Be Careful
[2] Liability After Disney
[3] Disney: Decision on the Merits
§ 4.06A Procedures for Protecting VC-Nominated Directors of Portfolio Companies
[1] Section 102(b)(7)
[2] Second Opinions
[3] Written Consent
[4] Ratification
[5] Complete Minutes
[6] Role of the Board Member
§ 4.07 [Reserved]
§ 4.08 [Reserved]
§ 4.09 [Reserved]
§ 4.10 Side Letters and Special Treatment of LPs: Problems and Commentary

The Placement Memorandum

§ 5.01 Preparation and Content of Placement Memorandum
§ 5.02 Model Placement Memorandum (Series A Round)
[1] Risk Factors
[2] “Bespeaks Caution” Doctrine
[3] [Reserved]
[4] Adjusted Statements and Projections
[5] Business Disclosures: Suggested Areas to Cover
[6] Impact on Valuation Issues
§ 5.03 Model Placement Agent Agreement
[1] Placement Agents
[2] Referral Letter Agreement

Portfolio Companies: Anti-Dilution and Compensation Issues

§ 6.01 Historical Background of Venture Capital Finance
§ 6.02 [Reserved]
§ 6.03 Section 409A of the Internal Revenue Code
[1] Overview
[2] Final Regulations
[3] Plans Included
[4] [Reserved]
[5] [Reserved]
[6] [Reserved]
[7] Stock Issues
[8] Recent Notices
[9] IRS Provides Relief for Unintentional Operational Violations of Section 409A
§ 6.04 Conclusion

Survey of Value of Deal Terms to Venture Capitalists

§ 7.01 Introduction to the Survey
[1] Survey Methodology
[2] Overview
[3] Venture Capital Glossary
§ 7.02 Survey Design
§ 7.03 Survey Results
[1] Background Questions
[2] Consideration Questions
[3] Protection of the VC’s Interest
[4] Commentary on the Results
§ 7.04 Conclusion
§ 7.05 Silicon Valley Venture Capital Survey-First Quarter 2017

Anatomy of a Cram Down: Selected Documents From a Series AA Financing

§ 8.01 Anatomy of a Round Cramming Down the Prior Series of Preferred
§ 8.02 Closing Agenda
§ 8.03 Consent of the Board of Directors
§ 8.04 Consent of the Stockholders
§ 8.05 Waiver of Anti-Dilution Adjustment
§ 8.06 [Reserved]
§ 8.07 Series AA Preferred Stock Purchase and Exchange Agreement
§ 8.08 [Fifth] Amended and Restated Stockholders Agreement
§ 8.09 [Reserved]
§ 8.10 Certificate of the Secretary
§ 8.11 Compliance Certificate
§ 8.12 Transmittal Letter
§ 8.13 Joinder Agreement to the Series AA Preferred Stock Purchase and Exchange Agreement
§ 8.14 Joinder Agreement to [Fifth] Amended and Restated Stockholders Agreement
§ 8.15 [Reserved]
§ 8.16 [Sixth] Amended and Restated Certificate of Incorporation
§ 8.17 Alternative Term Sheet B Round (Cram Down Features)
§ 8.18 Term Sheet, E Round: Selected Clauses Specific to Cram Downs
§ 8.19 Benchmark Capital v. CIBC: Parent Subsidiary Merger Enables a “Cram Down” Despite an Ostensible Veto
[1] A Brief Look Back
[2] Benchmark Capital v. CIBC: Drafting Matters
[3] Conclusion

Revising Expectations: The Future of Venture Capital and Entrepreneurship

§ 9.01 Introduction
§ 9.02 The New World
[1] Competition
[2] Market Opportunities
[3] Returns
[4] Valuations
[5] Talent
§ 9.03 Challenges for the Future
[1] Big Funds
[2] Corporate Investors
[3] Angel Investors
[4] Boutique Funds
[5] Club Funds
§ 9.04 Resetting Expectations
[1] On the Investor Side
[2] On the Entrepreneur Side
[3] Exits
§ 9.05 [Reserved]
§ 9.06 Hidden Traps: Rewards-Based Crowdfunding
§ 9.07 Critical Change in Section 1202 of the Tax Law
§ 9.08 IRS Tax Section 1202: Excluding Your Gains on Small Business Investments
§ 9.09 Explanation of a Special Purpose Vehicle (SPV)
[1] Introduction
[2] Model LLC Agreement of a Pledge Fund Special Purpose Vehicle
§ 9.10 Nine Reasons Your Start-Up Needs Patents
§ 9.11 [Reserved]
§ 9.12 [Reserved]
§ 9.13 [Reserved]
§ 9.14 The Entrepreneur’s Shares: A Balanced Approach To Founder’s Equity
§ 9.15 What You Need to Get Done Now If You Want to Sell Your Company
§ 9.16 Why You Should Be Using a Board of Advisors and How to Get the Most Benefit From It
§ 9.17 Form of Stock Incentive Plan
§ 9.18 Form of Master Services Agreement with Statement of Work
§ 9.19 Form of Non-Disclosure Agreement with Amendment No. 1
§ 9.20 Are You Savvy on Restricted Stock Units?
§ 9.21 Completing a Name Change Without Shareholder Approval
§ 9.22 Do You Really Own Your Employee’s Knowledge?
§ 9.23 Effectively Connected Income and Penny Warrants
§ 9.24 Should You Pay Someone Else’s Tax?
§ 9.25 An Introduction to Distributed Ledger Technology (Blockchain Technology)
§ 9.26 The Senate Banking Committee’s Hearing On Cryptocurrencies
§ 9.27 SEC Issues Report on Initial Coin Offerings (ICOs)

Delaware Guidelines

§ 10.01 Delaware Reinforces the Limits on Indemnification Claims
[1] Levy v. HLI Operating Company, Inc.
[2] Schoon v. Troy Corp.
[3] The Takeaway from Levy and Schoon
[4] Potential Contractual Workarounds
[5] Backstop Indemnity from Portfolio Company to the Private Equity Sponsor
[6] Other Contractual Protections at the Sponsor Level
§ 10.02 Delaware’s Duty of Disclosure
[1] Discount Rate Used for DCF Valuation
[2] Failure to Disclose Free Cash-Flow Estimates
[3] Disclosure of Arrangements with Incumbent Management
§ 10.03 Designating Delaware’s Court of Chancery as the Exclusive Jurisdiction for Intra-Corporate Disputes
[1] Introduction
[2] Is a Provision for Exclusive Jurisdiction in Delaware Enforceable?
[3] Additional Considerations
§ 10.04 Delaware M&A Guidelines
[1] In re Southern Peru Copper Corp. Shareholder Derivative Litigation
[2] In re Openlane, Inc. Shareholders Litigation
§ 10.05 [Reserved]
§ 10.06 Delaware Court of Chancery Clarifies Application of Business Judgment Review in Post-Closing Merger Context
§ 10.07 [Reserved]
§ 10.08 [Reserved]
§ 10.09 KKR Financial—Strong Confirmation by Delaware Chancery Court of Its Preference for Business Judgment Review Whenever Possible
§ 10.10 Delaware Formally Adopts Proposed Statutory Amendments Governing Mergers Following the Completion of a Tender Offer
§ 10.11 It’s Not Just A Delaware Thing: Other Courts Are Also Questioning Disclosure-Only Settlements In M&A Litigation

Board of Director Issues

§ 11.01 Good Corporate Governance: Best Practices for Creating Value
[1] Board Composition
[2] Board Agenda
[3] Board Packages
[4] Board Meetings
[5] Executive Sessions
[6] Committees
[7] Chairman/CEO Split
[8] Identify Risks and Put in Place Oversight Procedures
§ 11.02 Note on Indemnification
§ 11.03 Model Agreement of Indemnification of Directors and Officers
§ 11.04 [Reserved]
§ 11.05 [Reserved]
§ 11.06 Indemnity for Investment Professionals
§ 11.07 Fiduciary Duties of Directors in Negotiated Contractual Terms to Redeem Stock
[1] Delaware Cases
[2] Colorado Law
§ 11.08 Controlling Stockholder Transactions and Applying Entire Fairness Analysis
[1] Gentile v. Rossette
[2] In re CNX Gas Corporation Shareholders Litigation
[3] Gentile Lessons and CNX Considerations
§ 11.09 [Reserved]
§ 11.10 Contractual Nature of Preferred Stockholder Rights
[1] Background
[2] Court’s Analysis
[3] Ninth Circuit Holds that Debt Can Be Recharacterized as Equity
§ 11.11 [Reserved]
§ 11.12 Mergers and Compensation
[1] Application of Revlon Standard to Half Cash/Half Stock Merger
[1A] Revisiting the Rules of the Road in Revlon- Land
[2] Reverse Triangular Merger May Violate Contractual Non- Assignment Provision
[3] Section 409A Severance Plans and Other Deferred Compensation Programs
[4] Proposed Clarifications to Million Dollar Compensation Deduction Limit
[5] Carried Interest Legislation
§ 11.13 [Reserved]
§ 11.14 Forms for Board of Director Issues
[1] Equity Incentive Plan (Form)
[2] Convertible Promissory Note—Interest Payable in Common Stock (Form)
§ 11.15 [Reserved]
§ 11.16 The Dodd-Frank Act
[1] Advisory Votes on Executive Compensation
[2] Additional Requirements
[3] Say-on-Golden Parachute Vote
[4] Implementing Say-on-Pay, Say-on-Frequency and Say-on- Golden Parachute
[5] Compensation Committee Independence and the Use of Compensation Advisers
[6] Expanded Compensation Disclosure
[7] Additional Governance Provisions
[8] Specialized Corporate Disclosure
§ 11.17 Ability of Corporation to Redeem Preferred Stock
§ 11.18 [Reserved]
§ 11.19 Appraisal as the Exclusive Remedy in Connection with a Short Form Merger
§ 11.20 [Reserved]
§ 11.21 Limiting Private Equity Fund Exposure to the ERISA Obligations of Portfolio Companies
[1] ERISA Controlled Group Liability
[2] The PBGC’s Perspective on Private Equity Funds and ERISA Liability
[3] Sun Capital’s Reassertion of PE Fund Independence from ERISA Liabilities
[4] Implications
§ 11.22 [Reserved]
§ 11.23 [Reserved]
§ 11.24 [Reserved]
§ 11.25 The Use of Unregistered Broker-Dealers by Investment Advisers
[1] Background
[2] SEC Orders and Settlements
[3] Practical Considerations
§ 11.26 An Ounce of Prevention—Some Guidance for Target Boards
[1] Adviser Conflicts
[2] Projections
[3] NDAs and Standstills
[4] Motivations
§ 11.27 Is a Series LLC Right for Your Business?
§ 11.28 Revised Rule 504: Another Tool in the Toolkit to Raise Capital
§ 11.29 [Reserved]
§ 11.30 [Reserved]
§ 11.31 [Reserved]
§ 11.32 [Reserved]
§ 11.33 A Key Reminder to Directors of Delaware Corporations When Granting Equity Awards under an Equity Incentive Plan
§ 11.34 ABA Recommendations on Private Placement Broker- Dealers
§ 11.35 SEC Enforcement Action Related to Private Equity Fees and Expenses
§ 11.36 SEC Action Against Private Fund Adviser Highlights Importance of Proper Expense Apportionment
§ 11.37 Seniority Matters