editione1.1.4
Updated September 15, 2023You’re reading an excerpt of The Holloway Guide to Raising Venture Capital, a book by Andy Sparks and over 55 other contributors. A current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid. Purchase the book to support the author and the ad-free Holloway reading experience. You get instant digital access, over 770 links and references, commentary and future updates, and a high-quality PDF download.
Definition An assignment provision in a term sheet specifies that the investor may transfer some or all of their shares to a partner or closely related entity. This provision allows investors to move shares between funds and make distributions to their limited partners.*
danger Many standard assignment provisions require the recipient of the transferred shares to agree to the same terms as the investor. Founders should be wary of an assignment clause if it does not include this requirement or, even worse, if it uses language that explicitly allows assignment without the recipient taking on the investor’s obligations under the original investment agreement(s).
You may also see the word assign, or assignment, elsewhere in the term sheet. In these cases, it refers to any situation in which one individual or entity transfers a right to another.*
Definition An indemnification provision in a term sheet is a commitment by the company to defend and compensate board members in the event of litigation and/or settlement relating to the venture capital financing or the directors work on the company’s board. Indemnification provisions may also include a requirement that the company provide insurance for its directors to cover these costs.
danger Founders and investors should be aware that many states’ corporate laws do not allow companies to indemnify their directors for intentional misconduct. This can include acting in bad faith, acting in a manner that cannot reasonably be considered to be in the company’s best interest, and acting unlawfully while knowing their conduct was unlawful.* Venture capital firms and the board members they designate may be particularly vulnerable to claims that they have a conflict of interest with holders of common stock because of their own interests as holders of preferred stock, and companies generally cannot indemnify board members for this type of misconduct.*