DealLawyers.com Blog

Many private companies find themselves in need of financing & may be thinking about tapping fund investors in order to meet their need for capital.  This Sidley memo has some thoughts on what they’re likely to face when it comes to financing terms during the Covid-19 crisis. This excerpt says that companies should expect to see more “staggered” financings:

We expect to see more “staggered financings” or “financings in tranches” as a way for investors to de-risk transaction and bridge the gap between valuation disagreements. In staggered financings, companies and investors negotiate a set of funding milestones, which can be based on the development of a certain technology, satisfaction of a certain business plan or other financial projections provided during due diligence.

A staggered financing would provide for the same valuation for each tranche of the investment, irrespective of a company’s changed circumstances from the milestone achievement. As a result, the investor is able to better control the valuation at which it invests because the company will have achieved the milestones that were the basis for the investor’s agreement to the valuation in the first instance.

The memo also says that investors are likely to seek more demanding preferred stock terms, including enhanced liquidation preferences, participation rights, greater IPO valuation protection, broader voting rights, a greater prevalence of redemption rights and shorter redemption periods.  Companies also should expect to see more “pay-to-play” provisions under the terms of which investors may lose rights if they don’t participate in subsequent financing rounds.

– John Jenkins