"Drag It Out" Covenant

By way of follow up to Monday's post, here is a rough draft of a boilerplate "drag it out" covenant. The exercise is to model a concession that founders might ask from investors who may eventually take control of the board and represent a majority of the equity, in order to preserve the possibility that the founders could realize the potential tax benefit of the recently-extended 100% exclusion from capital gains of certain QSB stock purchased before January 1, 2012 and held for five years.

x.y Drag It Out Right. In the event that (i) the Board of Directors proposes, recommends, approves or otherwise submits to the shareholders of the Company, for shareholder action, a Deemed Liquidation Event, and (ii) a Holder has not received written notice from the holders of a majority of the shares of Key Holder Common Stock that such holders approve the Deemed Liquidation Event, then such Holder hereby agrees to vote (in person, by proxy or by action by written consent, as applicable) all shares of capital stock of the Company now or hereafter directly or indirectly owned of record or beneficially by such Holder against the Deemed Liquidation Event, to assert statutory dissenters’ rights with respect to the Deemed Liquidation Event, and to take such other action in derogation of the Deemed Liquidation Event as shall be requested by the holders of a majority of the shares of Key Holder Common Stock in order to carry out the terms and provision of this Section x.y. This Section x.y shall expire on [insert date five years from last significant founding issuance] and thereafter be of no further force or effect.

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