Negative Covenants . . .
refer to operating covenants which prohibit a company
from taking specified actions without the consent of the investor.
They are a regular part of venture financings and are designed to
protect the investor from future events that may dilute or undermine
the value of his investment. Since they also limit managementís
flexibility, negative covenants should be negotiated carefully. They
usually appear as part of the financing agreement or in the terms of
an investor's convertible preferred stock.
Negative covenants typically prohibit a company from
taking one or more of the following types of actions without investor
Altering the companyís charter or bylaws.
Changing the character of the business conducted
by the company.
Paying dividends, issuing new stock, or borrowing
funds that are convertible into stock.
Altering the preferences of the stock acquired by
Disposing of company assets or acquiring new
assets in transactions that fall outside the ordinary course of
the companyís business.
Voluntarily dissolving or winding up the company.
Entering into business transactions with
management of the company.
Agreements, Operating Covenants,