USA Law and Practice Contributed by: D. Scott Bennett, Nicholas A. Dorsey, Virginia M. Anderson and Ellen H. Park, Cravath, Swaine & Moore LLP
in the liquidation preference waterfall (see 3.5 Investor Safeguards ). Such consent can take multiple forms. In some instances, the holders of a majority of all con - vertible preferred stock voting together as a sin - gle class must approve a new financing round. In other instances, a majority of the convertible preferred stock must approve a new financing round on a series-by-series basis. As a practi - cal matter, the lead investor(s) in the previous financing rounds will usually have board rep - resentation and be apprised of the company’s Common stock is generally reserved for found - ers, employees and a limited number of early investors. Venture capital investors and other third-party investors will typically invest through convertible preferred stock and/or other con - vertible instruments. Convertible Preferred Stock The rights associated with convertible preferred stock typically follow the NVCA form documents and are primarily economic or governance- based in nature. Economic Terms Key economic terms include: • conversion rights, typically into common stock at a 1:1 ratio (with an automatic conver - sion in certain circumstances); • a liquidation preference, which determines the order of investor payouts resulting from a liquidity event; fundraising efforts already. 3.3 Investment Structure • voting rights to vote alongside holders of common stock on an “as converted” basis;
• dividend rights, typically in the form of a right to receive the same dividends paid to holders of common stock; • a right to participate in new security offerings; • corporate event-based anti-dilution protec - tions, ensuring that holders are not disad - vantaged by stock splits, stock dividends or other similar events; and • price-based anti-dilution protections, often consisting of downward adjustments to the purchase price of the shares previously pur - chased by preferred stockholders in the event of a down round equity financing. A handful of these economic terms of are dis - cussed under 3.5 Investor Safeguards . Pay-to-play provisions are also occasionally seen. A pay-to-play provision requires investors to participate in subsequent financing rounds on a pro rata basis or else have their existing pre - ferred stock converted to common stock. Governance Terms Key governance terms include: • rights to elect a certain number of board seats; and • stockholder and director veto rights over certain fundamental corporate actions, such as the issuance of senior and/or pari passu securities, mergers, payment of dividends, stock redemptions and actions adverse to the rights of the convertible preferred stock. These governance features are discussed under 3.6 Corporate Governance . Other Terms Additional rights that do not fit squarely with - in the “economic” or “governance” buckets include:
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