We’re mainly referring to investor abandonment and venture debt term sheets.
The Investor Abandonment Clause is used primarily by banks, and what banks are looking for because they’re loaning money to really risky startups is that they want to have a little bit of leverage over the company.
The investor abandonment allows the bank to be able to call the investors and say, “Hey, are you going to put more money in the company?” If the investors decline, that triggers the Investor Abandonment Clause, which then puts the startup in default.
Once you’re in default, you have to play by the bank’s rules either to sell the company, raise more money, do whatever the bank wants.
Therefore, we at Kruze Consulting are really careful about Investor Abandonment Clauses and actually recommend clients negotiate that out of their term sheet.
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