Triblr.com by Vlad Stan

Let’s continue with our second lesson of VC language. Today, we’ll explore some more of the frequently used terms of the VC term sheets. Following the links provided upon each definition, you’ll find broader explanations for the terms.

Redemption Rights
Rights to force the company to purchase shares (a “put”) and more infrequently the company’s right to force investor to sell their shares (a “call”). A Put allows one to liquidate an investment in the event an IPO or public merger becomes unlikely.

Conversion
Refers to the fact that preferred stock is convertible into common stock. This allows the buyer of preferred to convert to common stock should he determine on a liquidation that he is better off getting paid on a pro rata common basis rather than accepting the liquidation preference. It can also be used in certain extreme circumstances whereby the preferred wants to control a vote of the common on a certain issue.

Conditions Precedent to Financing
It is a paragraph in the term sheet that you should definitely pay great attention to, as you could not have a deal at all, even if you signed the term sheet, if your company doesn’t meet these conditions.

Vesting
Typically, stock and options will vest over four years – which means that you have to be around for four years to own all of your stock or options. If you leave the company earlier than the four year period, the vesting formula applies and you only get a percentage of your stock. As a result, many entrepreneurs view vesting as a way for VCs to “control them, their involvement, and their ownership in a company”.

Information Rights
It means that the company will have to deliver regularly to the investors, until the IPO, such documents like Company’s annual budget, audited annual and unaudited quarterly financial statements.

Registration Rights 

These are provisions that allow investors to sell stock via the public market (IPO). On the other hand, registration rights are often the only exit vehicle that, as a practical matter, the minority shareholders can compel. Read also on registration rights.

Right of First Refusal
The right of first refusal gives the major investor, in this case, which can be clearly defined in terms of number of purchased shares, the right to buy particular shares before any other proposed buyer is accepted.

Voting Rights
Refers to the fact that preferred stockholders vote like the common stockholders in the affairs of the company, with some exceptions. Anyway, all the heavy rights are contained in other sections, such as the protective provisions, you have to pay special attention to.

Employee Pool
The employee pool section clarifies the capital structure and specifically call out the percentage of the company that will be allocated to the option pool, allocated to directors, officers, employees and consultants financing.

Read, also, the first part and the next part of the article.