Which Series Seed terms are disadvantageous to investors? Should an investor try to modify these terms?By http://profile.typepad.com/1237764140s22740 // October 1, 2012 in Angels, Seed Financings
The following is the answer I gave on Quora this past weekend, to two questions put to me by Samuel Chenard. His questions are: "Which Series Seed terms are disadvantageous to investors? Should an investor try to modify these terms?"
There are no Series Seed terms that are disadvantageous to investors (plural). For a round of seed financing, the Series Seed terms are investor friendly, and they spare the company and the investors the cost and effort of negotiating customized terms.
If you're an individual investor, participating in the Series Seed round with other investors, then you do have an personal stake in where the definition of "Major Investor" is set. Let's say you mean to invest $25,000 in the round, but the term sheet says you need to invest $50,000 to be a "Major Investor." You would do well try to modify that term, to lower the threshold to the amount you mean to invest. The reason is that "Major Investors," under the Series Seed documents, are entitled to participation rights in subsequent financings, as well as information rights.
Another term that is arguably disadvantageous to an individual investor, singular, who does not control the Series Seed as a class, is a drag along covenant that is in the Series Seed documents. This covenant requires the individual investor to vote in favor of a sale, if a majority of the common, the Series Seed, and the company's board approve the sale. This covenant makes it harder for a minority shareholder to block a sale she does not want. On the other hand, I would argue that the drag along covenant is probably, in most cases, protective of all investors, insofar as it helps ensure that a transaction can occur, if in fact a majority of the Series Seed round is in favor of it.
Photo: "Sweet Bay Seed" by Phlora / Flickr.