UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
acquisition or an IPO, according to research by Beauhurst. Exit Provisions Liquidation preferences These dictate the order and amount of inves - tors and other shareholders in capital returned during a liquidity event. The mechanics of the liquidation preference structure are based on the structure of the preference stack, liquidation multiple and participation rights. If the company is wound down or sold for a lower valuation than the original investment, investors holding pre - ferred shares will most likely have their capital returned before holders of ordinary shares, such as the founders or employees. Drag- and tag-along rights Drag-along rights favour majority shareholders who want to sell the company by empowering them to compel minority shareholders to partici - pate in the sale. Tag-along rights are the natu - ral inverse to drag-along rights, which provide protection for minority shareholders by ensur - ing they can participate in the sale on the same terms as the majority shareholders and not be left in a company where a majority of sharehold - See 5.1 General . In a liquidation event, a vesting schedule may be accelerated to allow founders to realise the full value of their shareholding ear - lier than forecast. The same may apply to option schemes, whereby “single-trigger” acceleration would allow option holders to exit in full upon M&A. US acquirers will be used to “double-trig- ger” event, where the exit is only one part of the acceleration but another condition must be met to accelerate in full (ie, a further retention period with the acquiring entity). This is often a discus - ers have sold out. Vesting schedules
sion/negotiation point in acquisitions, and due diligence is required upfront. Conversion of shares In the event that the qualifying threshold for an IPO is met, all preference shares will be con - verted to ordinary shares. Generally, any inves - tor can request that their preference shares be converted at their instruction. Registration rights When an IPO takes place on a US stock exchange, investors are entitled to registration rights, which include demand rights and shelf and “piggyback” registrations to ensure that all shares are listed. Transfer restrictions Transfer restrictions include: • pre-emption rights on transfer that give share - holders a right of first refusal to purchase any shares up for sale before they are offered to third parties; • a lock-up period of (typically) 90–180 days after an IPO, during which shareholders are prohibited from selling their shares to safe - guard investors, ensuring long-term dedica - tion; and • consent – shareholders may be restricted from transferring their shares without consent from the board or other shareholders; found - ers, in particular, may be locked in perma - nently or for a certain period of time, again to ensure the orderly functioning of the business and that management is retained. 6.2 IPO Exits IPO exits have historically been the natural pro - gression for a venture company that has been growing rapidly for a number of years. Various external and internal factors – eg, business per -
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