USA Law and Practice Contributed by: D. Scott Bennett, Nicholas A. Dorsey, Virginia M. Anderson and Ellen H. Park, Cravath, Swaine & Moore LLP
• drag-along rights, which require investors to participate in a sale of shares approved by a specified threshold of convertible preferred stock and other specified parties; • a right of first refusal (ROFR) for investors and/or the company to purchase shares of common stock proposed to be sold by cer - tain stockholders (typically the founders and other key holders); • tag-along or “co-sale” rights, which allow investors to participate in a sale of their shares if an ROFR is not fully exercised; and • registration rights, which allow preferred stockholders to participate in (and, in certain situations, require the company to facilitate) registered offerings of their securities (allow - ing their securities to be freely sold in the public markets). These are discussed in 6.1 Investor Exit Rights . Other Convertible Instruments Other convertible instruments, such as convert - ible notes and SAFE instruments, are commonly used by growth companies in the USA before their first priced equity round. Upon their first priced equity round (sometimes subject to a minimal capital raise requirement), the instru - ments convert into equity at either a discount to the priced round or subject to a valuation cap. Investors in these instruments typically include “friends and family” , “angel investors” and a lim- ited number of venture capitalists that invest in early stage growth companies. Although inves - tors in these convertible instruments do not ben - efit from the same rights as those given to actual common stockholders or preferred stockhold - ers, large investors may seek information rights, board observer rights or other rights typically reserved for other equity holders.
The SAFE was created by Y Combinator, which maintains three versions of the SAFE for USA companies: • a discount SAFE; • a valuation cap SAFE; and • “Most Favoured Nation” (MFN) SAFE, which provides that any better terms granted to a subsequent investor will automatically apply to the SAFE. There is no standardised form convertible note in the US – although law firms sometimes maintain their own forms. 3.4 Documentation Growth company financing rounds in the USA typically follow the NVCA form documents. The typical suite of financing documents includes: • a stock purchase agreement that covers the purchase of stock, sets forth any closing conditions, and includes representations and warranties of the parties; • a ROFR and co-sale agreement that subjects the sale of stock by certain stockholders to a ROFR in favour of other investors and/or the company and, in the event the proposed stock is not so purchased, permits such investors a right to “tag along” in the pro - posed sale; • a voting agreement that provides stockhold - ers with the right to designate certain mem - bers to the board of directors ( “board design- ees” ) and the right to “drag along” other investors in a sale of the company if specified conditions are met; • an investors’ rights agreement that specifies the rights and privileges granted to stock - holders (including information rights, registra - tion rights and pre-emption rights) and speci - fies any matters requiring the approval of the
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