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AN ENTREPRENEUR’S CHECKLIST
The entrepreneur who for the first time enters into negotiations with prospective venture capital
investors is likely to confront a number of concepts, many of which may be new and unfamiliar.
Following is a short checklist of such concepts, with a brief explanation of each:
CONVERSION RIGHTS. Preferred stock will be REGISTRATION RIGHTS. Preferred investors generally
convertible into common stock at some conversion ratio, will receive registration rights as a part of their investment.
which is typically expressed as the initial purchase price of These rights provide liquidity to investors by allowing them
the preferred stock divided by a “conversion price,” which to require the company to register their shares for sale to the
initially equals the purchase price but is subject to adjustment public either as part of an offering already contemplated by
upon the happening of certain events. Conversion is the Company (“piggyback rights”) or in a separate offering
generally available at any time at the option of the initiated at the investors’ request (“demand rights”).
stockholder and may be automatically triggered by certain
occurrences, such as an initial public offering.
VESTING ON FOUNDERS’ STOCK. As a protection
against founders leaving the company after the investment
ANTI-DILUTION PROTECTION. The conversion price money is in, venture capitalists generally insist on some sort
of the preferred stock will be subject to adjustment for of “vesting” on founders’ stock, so that a percentage of such
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stock, decreasing over time, is subject to repurchase by the
company at cost if a founder’s employment ends.
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