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3.2. Liquidity Event. If there is a Liquidity Event prior to the conversion of the Investment Amount pursuant to Clauses 3.1 or 3.3, the Investment Amount shall be converted into that number of shares of the Capital Stock of the Company, equal to the Investment Amount divided by the Liquidity Price. At least ten (10) days prior to the closing of the Liquidity Event, the Company shall notify the Investor in writing of the terms of such Liquidity Event. The shares delivered to Investor pursuant to the conversion of the Investment Amount shall be shares of the Preferred Stock of the Company.
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Legal text
3.2. Liquidity Event. If there is a Liquidity Event prior to the conversion of the Investment Amount pursuant to Clauses 3.1 or 3.3, the Investment Amount shall be converted into that number of shares of the Capital Stock of the Company, equal to the Investment Amount divided by the Liquidity Price. At least ten (10) days prior to the closing of the Liquidity Event, the Company shall notify the Investor in writing of the terms of such Liquidity Event. The shares delivered to Investor pursuant to the conversion of the Investment Amount shall be shares of the Preferred Stock of the Company.
Summary
In simple terms, this section talks about a situation where the company goes through a major financial event like being sold or going public. If this happens before the investor's money is converted into company shares according to the earlier sections, the investor's money will be turned into a specific number of shares based on a certain price. The company must inform the investor about this event and its details at least 10 days before it happens. After the conversion, the investor will own preferred stock (a special type of share) in the company.
What to negotiate (for term sheets)
As a lawyer, I would recommend negotiating the following provisions in this clause:
1. Clarify the definition of "Liquidity Event": It is important to specify the types of events that would qualify as a Liquidity Event in the agreement. This might include a merger, acquisition, IPO, or other similar transactions. This language will help to ensure that there is no ambiguity or confusion about what constitutes a Liquidity Event.
2. Negotiate the Liquidity Price: The Liquidity Price should be agreed upon during the negotiation of the term sheet. This will be the price at which the Investor's Investment Amount will be divided to calculate the number of shares they will receive. It is important to negotiate this price to ensure that it is fair and reasonable, and to prevent any potential dilution of the Investor's ownership.
3. Include anti-dilution provisions: There should be anti-dilution provisions in the agreement to protect the Investor against dilution if the Company issues additional securities at a lower price than the Liquidity Price. There are different types of anti-dilution provisions, such as full ratchet, weighted average, or the more favorable of these provisions. The type of provision agreed upon should be tailored to the specific situation and the parties' interests.
4. Negotiate the timing of the conversion: It is important to negotiate the timing of the conversion of the Investment Amount into shares. The current language in the clause suggests that the conversion will occur automatically if there is a Liquidity Event prior to conversion pursuant to Clauses 3.1 or 3.3. However, it may be beneficial for the Investor to have the option to choose when they want to convert their investment, especially if the Liquidity Price is not favorable or the Investor wants to retain their investment for a longer period of time.
5. Clarify the terms of the Preferred Stock: The clause provides that the shares delivered to Investor upon conversion will be shares of the Preferred Stock of the Company. It may be beneficial to negotiate the terms of the Preferred Stock and specify the rights and preferences of the Investor as a Preferred Stockholder. It is also important to ensure that the Investor has access to the same information and voting rights as other Preferred Stockholders.
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