Key terms when taking ~20% minority stakes in tech companies
March 21, 2020
by a searcher from Claremont McKenna College in San Francisco Bay Area, CA, USA
Sometimes management of a tech company has GREAT domain expertise that can't be replicated by an outsider. When taking a `~20% minority stake (through common, convert, or preferred) in a such a company, what are the key terms you insist on, such as 1) board seat (on ideally only 3 person board), 2) limits on company debt, 3) limits on future dilution, 4) limits on management pay, 5) right to sell your shares based on future milestones. Thanks for any thoughts!
from The University of Chicago in Chicago, IL, USA
Additionally, the model forms of Investor Rights Agreement and Certificate of Incorporation each have specific sections for minority investor approval rights. In the IRA, see the investor director approvals section; in the Certificate of Incorporation, see the protective provisions section. As Musa noted, a liquidation preference is common and to be expected in most cases as an economic right, as well.
Of the items that you mentioned, you'll board rights embodied in the Certificate of Incorporation (see election of directors in the preferred stock section) and the Voting Agreement. Items 2-4 on your list will be in the approval sections I mentioned above. The right to sell your shares based on future milestones is less common, for what it's worth.
Access the NVCA model documents here: https://nvca.org/model-legal-documents/
from University of California, Santa Barbara in Los Angeles, CA, USA