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Equity Investment Term Sheets > Equity Investment Term Sheets - Pg. 68

Financing a Game Development Venture 68 · Voting Rights. The investors may want their stock to have special voting rights and approvals, such as the right to veto even an overall majority of the stockholders on certain key issues like amendments to charter documents; redemption or repurchase of any stock; large acquisitions by the company of stock or assets of another company; grants of exclusive rights to any intel- lectual property or exclusive distribution rights; payment of dividends; or a sale, merger, liqui- dation, or change of control transaction. Also known as protective provisions , these rights will be listed in the charter. · Information Rights. This requires the company to deliver to the investor certain periodic financial statements and the right to inspect the books of the company. This would appear in the investor rights agreement or the purchase agreement. · Preemptive Rights. Under this provision, if the company proposes to do another round of fi- nancing or otherwise issue more stock, with certain exceptions, the company must first offer such equity securities to the investor (and the founders, if they can negotiate this) on a pro rata basis (based on their initial investment). These rights can be waived, and sometimes a new investor will require such waiver. This right would appear in an investor rights agreement or a stockholders agreement. · Right of First Refusal/Tag-Along/Drag-Along. This is a right of the investor's preferred stock to, at its election, purchase the founders' shares before they sell them to a third party (with certain exceptions, like family trusts, and so forth). The founders may get this right as well. A tag-along right is a way to give the investors some liquidity by allowing them to participate in a sale by the founders to a third party on a pro rata basis. In other words, if a third party agrees to buy 10 shares from a founder, and the Series A investors own half of the company, the Series A in- vestors could elect to sell 5 of their shares and the founder would sell 5 of his shares to the third party. A drag-along right is where a majority of the shareholders, or a majority of the preferred, want to sell the company to a third party and can force the holdouts to sell their shares as well.