Redemption Rights
Redemption rights give investors that hold preferred stock the right to require that a company repurchase their shares after a specified period of time. They are designed to protect investors when a company’s valuation is stagnant, and is no longer an attractive acquisition target or IPO candidate. While rarely included in a term sheet, they can represent a major problem to companies that do not intend to generate positive cash flows for some time and as a result will not be able to pay back the investor in the event they exercise their right.
Before you sign a term sheet it is imperative that you understand the rights that your potential investors expect—do not agree to terms that you do not understand or have not discussed with your council. The last thing you want to have happen is an investor demands that you buy back their shares, and you don’t have enough capital to pay them back, or you have just enough capital to pay them back, but doing so will jeopardize your ongoing operations.
Refinancing
The term ‘refinancing’ refers to the ability of a financier to adjust the terms of a loan on the basis of a business’s credit or repayment status/ The typical terms that are adjusted include the: interest rate (if fixed), payment schedule, and payment amount. Borrowers typically refinance when interest rates fall, or when they have a variable interest loan and rates are on the rise.
Registration Rights
The term ‘registration right’ refers to the ability of an investor (who owns restricted stock) to require a company to go public so that the investor can sell their shares. There are two primary forms of registration rights: “piggyback”, which allow investors to have their shares included in a registration (IPO) that is currently in the planning stages by the company and “demand” which allow the investor to require a company to go public even if they’re not planning to do so in the near future.
Before you sign a term sheet it is imperative that you understand the rights that your potential investors expect—do not agree to terms that you do not understand or have not discussed with your council. The last thing you want to have happen is an investor demands that you go public, and you are not ready or prepared to go public.
Repayment Terms
The repayment terms of a loan stipulate the time period in which the debt is required to be paid back, the fixed (or variable) payment amount, the interest (or discount) amount associated with the loan and any associated provisions related to the agreement.
Representations and Warranties
The term ‘representations and warranties’ refers to the set of assurances given by both parties in an agreement. Representations and warranties are not required by law but are in nearly every purchase agreement of equity. The primary goal of representations and warranties is to transfer risk from the buyer to the seller, and vice versa.
Retention of Title
The term ‘retention of title’ refers to the provision in a contract for the sale of goods, which enables the seller of the goods to maintain ownership of the goods (title) until the buyer fulfills their obligations, which can include the payment.