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Updated September 19, 2022
Angel Investing

You’re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.

Terms in this section impact how and when you might get cash back out of the investment. We discuss liquidation preferences in the section covering preferred stock, since a liquidation preference is most typically a facet of a preferred stock financing.

Redemption Rights

Redemption rights (or put right) are the rights to have your shares redeemed or repurchased by the company at the original purchase price or some multiple, usually after a period of time has passed (perhaps five years). It is also possible to prepare these provisions to allow redemption in the event the company fails to reach a milestone, or breaches a covenant.

cautionBe aware, however, that even if you have redemption rights, if a company is insolvent it will not be able to legally satisfy a redemption demand. Under most states’ corporate laws, corporations are disallowed from redeeming shares when the corporation is insolvent either on a balance sheet or ability to pay its debts as they come due, and directors are personally liable if they authorize a redemption when the corporation is insolvent.

Redemption rights are not common in angel deals. However, they can be appropriate and a good mechanism to employ if a business has the danger of becoming a lifestyle business for the entrepreneur. If you want to put redemption rights in place in order to avoid a lifestyle business outcome, you will probably also want to put in place covenants, such as restrictions on founder salaries—perhaps subject those to the approval of a compensation committee composed entirely of independent directors—to ensure that the redemption rights will have value and are enforceable when they come due.

Registration Rights

A registration rights agreement is an agreement of the company to register securities with the Securities and Exchange Commission so that the holder of the securities can sell them. When investors demand the company register the investors’ shares, it is so the investors can sell those shares on the public market and get liquidity—the liquidity goes to the investors, not the company.

Registration rights are not common in angel deals. However, it would be perfectly appropriate for an angel to ask to have the same registration rights granted to a future investor. The following language would suffice to achieve this:

⚖️legaleseThe company agrees that in the event that the company enters into a registration rights agreement with future investors in the company, the company shall include the Investors with the coverage thereof to the same extent and with the same rights as such future investors.

You can find an example of a registration rights agreement in the Investor Rights Agreement at NVCA.

Co-Sale or Tag-Along Right

The co-sale right (or tag-along right) is the right to participate alongside another stockholder, typically a founder, when that stockholder is selling their shares.

If the value of a company’s stock has gone up significantly, but it is still far from a liquidity event, and the founders are selling some of their shares to an outside investor, you may want to sell some of your stock and realize a gain. This right is useful if you are concerned that the founder might find a buyer for his or her shares and leave you behind.

In a world in which it can take ten years for a company to go public, it is reasonable that founders would want to sell some of their shares to take some money off the table and improve their lifestyle. As an early investor, you would like to do the same thing if they have found a buyer, which is why you want a co-sale right.

Representations and Warranties

Representations (or reps) and warranties can cover a broad range of topics in a financing transaction and they typically get more thorough as the amount of money gets bigger. In general terms, a representation is an assertion that the information in question is true at the time of the financing, and the warranty is the promise of indemnity if the representation turns out to be false. For example, a company might rep that they have no unpaid salaries, or that they are not currently being sued. We address two more specific reps below.

If you want to get a taste of probably the most typical sort of representations and warranties companies give in private financings, you can review the representations and warranties in the Series Seed documents.

Cap Rep

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