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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Term Sheet: Compelled Sale Right

Comments (7)

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.

My first reaction was “what the fuck?”  My second reaction was “eh – this is just a different twist on redemption rights.”  But – then I thought about it some more and thought “you’ve got to be kidding me!”

So – after seven years, if there hasn’t been a liquidity event, a VC that owns at least 10% of the company can force all the other shareholders to sell their shares to an unaffiliated third party.  Read it slowly and think about it.  Basically, this term gives a minority shareholder the right to sell the company after 7 years, with no input from any other shareholders.

Be forewarned – this is not a nice term.

  • Dave Jilk

    The only real difference between this and a drag-along, or for that matter demand registration rights, is that they can compel it from an extreme minority ownership position. Consequently, the issue is simply how much of the company they need to own to be able to compel this.

    Plus, this provision will never stand up in later rounds, the later investors will insist that it be waived.

  • Osman

    “not a nice term?”

    Perhaps that that other word you like so much may be more appropriate?

    Starts with F…

  • http://www.secretelite.com/michael Michael Ridley

    It seems to me that this is not ideal, amongst other reasons, because it says nothing about the value of the proposal. Also it says unaffiliated third party, but does that mean unaffiliated with the company or unaffiliated with the VC, or both? Does that mean the venture partner’s sister can buy the company for $10? Maybe there would be some issues with negotiating with unclean hands there, but it seems quite vague and bad.

    -m

  • Eliot Jacobsen

    Holy Smokes, Brad!

    Any CEO, board member or start-up attorney that would agree to this term should be fired and sued by the other 90% of the shareholders.

    Any VC that asks for it, should be put on a National Child (Company) Molesters list and publically shamed.

    In either case, it seems to me that the exercising of such a right would be practically indistinguishable from fraudulent conveyance.

    EJ

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