Tech investors are increasingly writing in veto rights to their term sheets, making sure a company goes public at a certain price, or else.
In a new report from The Information, a review of 136 term sheets found that the practice is on the rise as venture capital funding chills down.
In The Information’s analysis, only 15% of the terms sheets of highly valued companies had IPO blocking rights during the first three quarters of 2015. Once the “great reset” in venture capital began in Q4 of 2015 and into the new year, the number rose to 24%.
What does this mean to companies? Investors can basically veto a public offering if the price isn’t to their liking. Fintech company, Affirm, for example, gave some of its investors rights to block an IPO if it’s not priced at 2.5 times its latest valuation.
It’s not a lost cause if a company prices too low. Investors could negotiate for extra shares to let it go through at the last minute. The rise of veto rights though does mean startups have yet another hurdle to clear before going public.