

Ask HN: What to do when your funding round is oversubscribed? - EGreg

Here is the situation. I currently have several angel investors that have funded our company, and I would like to draft an agreement that gives them two options at the next round of funding:<p>1) Sell their shares back to the company for what they are worth at the next round's pre-money valuation, up to whatever $ they have invested in this round. The rest of the shares may be sold if both the investors and the company agree, otherwise they have to hold on to them (in essence, they got a stake in the company and also their original money back).<p>2) Invest alongside the second round investors at the same terms.<p>I can see #1 presenting no trouble (correct me if I'm wrong). But as for #2, I am running into a legal question:<p>what happens if the second round is oversubscribed? If the company will have to give them the opportunity to invest alongside other investors (VC firms, say) but the round is oversubscribed, then everyone will have to invest less, or the company has to issue more shares. What if the VC firm doesn't want to invest less? What if the company doesn't want to issue more shares? How to solve this equitably for everyone, and how to phrase it in the agreement?<p>Advice would be appreciated.
Greg
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EGreg
Here is the relevant portion:

1\. DEFINITIONS:

The following definitions apply in the Agreement

a. “Parties” means both the Company and Investor. Party means one of them.

b. “Current funding round” refers to the round of funding which is taking
place during the time of signing of this agreement.

c. “Next round of funding” refers to the very next round of funding that takes
place after the current funding round is closed.

2\. TERMS

2.1 Investor Options:

2.1.1 Before the close of the next round of funding, Company agrees to notify
Investor of the date on which the round is expected to close, the amount of
money committed in the round, and the total number of shares that are expected
to be sold for that money. This will determine the pre-money valuation of the
shares before the closing of the next round of funding.

2.1.2 Investor shall have the option of selling back to the Company up to
$25,000 of the shares they own in Company, as determined by the pre-money
valuation of these shares (rather than their valuation during the Current
funding round). The remainder of the shares may be sold to the Company if both
Parties decide agree to the sale in writing at that time. Otherwise, they
shall continue to be held by Investor.

2.1.3 During the next round of funding, Company shall give Investor the
opportunity to invest alongside the other investors in that round, and on
equivalent terms. Investor recognizes that Company may set the maximum number
of shares it is prepared to issue and sell during the next round of funding,
and the round may be oversubscribed. In this case, Parties will work together
with the other investors to work out an equitable arrangement, which may cause
one or more investors in the next round to purchase a different number of
shares in Company than was reported by Company to Investor in 2.1.1 .

2.2 Time Frames:

2.2.1 Company will notify Investor as described in 2.1.1 at least fifteen (15)
days before the close of the next round of funding.

2.2.2 Investor will have five (5) business days to respond to Company
regarding their decision to invoke either of options 2.1.2 and 2.1.3 . If
after this period, Investor has not indicated to Company that they will invoke
either of these options, then both Parties agree to proceed as if Investor has
indicated to Company they choose to invoke neither of the options -- and in
particular, that the Investor will continue to own the same shares as they did
previously, neither selling any of them nor investing alongside other
investors.

2.2.3 Should circumstances arise that necessitate further negotiation,
Investor and Company agree to participate in good faith in these negotiations,
recognizing that the next funding round should be completed in a timely manner
and that the terms should be equitable to all Parties.

