Structuring Down-Round Financing: Anti-Dilution Protections, Employee Considerations, Mitigating Board Conflicts
Course Details
- smart_display Format
On-Demand
- signal_cellular_alt Difficulty Level
Intermediate
- work Practice Area
Banking and Finance
- event Date
Tuesday, March 12, 2024
- schedule Time
1:00 p.m. ET./10:00 a.m. PT
- timer Program Length
90 minutes
-
This 90-minute webinar is eligible in most states for 1.5 CLE credits.
This CLE course will analyze down-round financings from the vantage point of the company and its investors. The panel will discuss the implications of a down round for employees and existing stockholders, board fiduciary and process issues, and technical and structuring considerations.
Mr. Futter is the Senior Counsel to the President of Touro University. Previously he was a venture capital and technology attorney in private practice. He has been the general counsel of both a venture capital firm and a venture backed startup. Mr. Futter serves on the legal advisory board of the Angel Capital Association and previously served on the Model Forms Drafting Group of the National Venture Capital Association. Mr. Futter participated in the drafting of the Angel Capital Association's Model Convertible Promissory Note.
Mr. Lee is a member of the firm’s Private Equity and Mergers & Acquisitions Groups. He has extensive experience advising private equity funds, venture capital funds, private investment firms, high-net worth family offices, and their respective portfolio companies in a variety of domestic and cross border transactions, including M&As, leveraged buyouts, growth equity investments, AIV structure transactions, recapitalizations, reorganizations, acquisitions and divestitures, and debt and equity security investments. Mr. Lee’s transaction experience is across a targeted spectrum of industries, including healthcare and digital healthcare, manufacturing/aerospace, industrial, industrial-tech and distribution, advertising technology, Internet of Things, SaaS based services, internet-based products and services, fin-tech, and oil and gas supply-chain and related services. In addition, he advises senior executives, senior advisors, boards of directors, and private equity funds on corporate governance matters, portfolio company operations and management, and executive compensation arrangements and separations. He also advises private equity funds in connection with fund formation, launch and management matters, and advises private investment funds in the formation, offering and management of special purpose investment vehicles, including pledge-capital arrangements.
The current economic environment has required many startups to seek down-round financing, in which the company has a reduced valuation from its prior financing round. Down rounds have important implications for employees and existing investors and can involve complex structuring concerns. Boards and controlling shareholders must consider any conflicts of interest and the risk of shareholder actions in response to such financing.
Stock options or other equity awards are important tools for retaining key personnel. Down-round financing reduces the value of employee stock awards and the prospects for a profitable exit. Boards may need to consider additional equity awards or a management carve-out plan to prevent key employees from departing.
Directors have a fiduciary duty to their shareholders and may have conflicts of interest, resulting in litigation from shareholders or creditors negatively impacted by the down round. To mitigate this risk, a board might consider the appointment of an independent committee to evaluate the proposed transaction, a disinterested stockholder vote, or a rights offering for existing shareholders.
Down-round financing may be further complicated by anti-dilution provisions in favor of preferred shareholders, which may allow them to receive a more favorable conversion rate and enhanced voting rights due to the new round of investment. Before proceeding, the parties will need to determine when a conversion occurs and how it will be documented.
Listen as our authoritative panel discusses these and other nuances of down-round financings.
- Down-round financing and its impact on existing investors
- Board fiduciary duties: mitigating risk of shareholder suits
- Independent committee
- Vote of disinterested shareholders
- Rights offering
- Addressing employees with devalued stock awards and options
- Structuring issues
- Anti-dilution protections
- Redemption rights
- Pay-to-play options
The panel will review these and other significant issues:
- How might down-round financing affect existing employees who hold company stock?
- Given the potential board conflicts inherent in down-round financing, what can the board do to mitigate against the risk of shareholder actions?
- What are the different types of anti-dilution provisions, and how do they impact the financing structure?
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