Earlier this week, we discussed the meaning of some common terms found in venture deals and the potential impact they carry for your company when seeking venture capital. In this edition of the Buzz, we are furthering that discussion by taking a closer look at some additional terms.
What is Redemption?
Redemption is the right or obligation of a company to repurchase its own shares.
Redemption Rights force the company to purchase shares (a "put") and more infrequently the company's right to force the investor to sell their shares (a "call").
What are Cumulative Dividends?
Cumulative Dividends are payments to shareholders made with respect to an investor's Preferred Stock. Generally, holders of Preferred Shares are contractually entitled to receive dividends prior to holders of Common Stock. Dividends can accumulate at a fixed rate (for example 8%) or simply be payable as and when determined by a company's Board of Directors in such amount as determined by the board. Because venture backed companies typically need to conserve cash, the use of Cumulative Dividends is customary with the result that the Liquidation Preference increases by an amount equal to the Cumulative Dividends.
Full Ratchet Antidilution is the sale of a single share, at a price less than what the favored investors paid, reducing the conversion price of the favored investors' convertible preferred stock "to the penny". For example, from $1.00 to 50 cents, regardless of the number of lower priced shares sold.
Weighted Average protection is when the investor's conversion price is reduced, and thus the number of common shares received on conversion increased. In the case of a down round, it takes into account both: (a) the reduced price and, (b) how many shares (or rights) are issued in the dilutive financing.
As mentioned, these are just a couple of deal terms found in a venture deal, but ones that carry a tremendous amount of weight in the negotiation process. For those of you wanting to know the actual deal terms for specific companies, we invite you to access our collection of over 15,000 companies. For more information on the Valuation & Deal Term Database, please call (646) 290-9254 or send an email to email@example.com.