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Tech investors are increasingly writing veto rights into their term sheets to make 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.
In The Information's analysis, only 15% of the term sheets of highly valued companies had IPO blocking rights during the first three quarters of 2015. From when the "great reset" in venture capital began in Q4 of 2015 into the new year, the number rose to 24%.
What does this mean for companies? Investors can basically veto an initial 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 wasn't priced at 2.5 times as much as its latest valuation. DoorDash investors can veto if it's less than three 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, means startups have yet another hurdle to clear before going public.
You can read The Information's full report here.
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