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- That they are organized and in good standing
- That the investors’ decisions legally bind their corporation or organization
- That they will perform all of their obligations if all conditions are met. This generally means
that they will come up with the money if conditions are met.
V. Affirmative Covenants
These are all the things the entrepreneurs agree to do under the terms of the investment agree-
ment and in the operation of their business. Typical covenants are:
- Pay taxes, file reports, obey regulations
- Pay principal and interest on debts
- Maintain corporate existence
- Keep books, have statements audited, allow investors access
- Maintain insurance
- Maintain minimum net worth, working capital, and asset levels
- Hold directors’ meetings
VI. Negative Covenants
These are all the things that the entrepreneurs agree not to do in the course of operating their
business. Negative covenants may be abrogated with investor approval. Typical covenants are:
- Not to merge with, consolidate with, or acquire another business
- Not to change the corporate charter or bylaws
- Not to sell additional stock unless specified in the agreement
- Not to pay dividends unless specified
- Not to violate any of the affirmative covenants
- Not to liquidate the business or declare bankruptcy
VII. Conditions of Default
This section spells out the circumstances under which entrepreneurs are considered to have vio-
lated the agreement. These include:
- Failure to comply with affirmative or negative covenants
- Misrepresentations of fact
- Insolvency or reorganization
- Failure to pay interest and principal
VIII. Remedies
The specific remedies available to the investors if violation should occur include:
- Forfeiture to the investor of voting control
- Forfeiture of stock held in escrow for this purpose
- The right of the investor to sell his stock back to the company at a predetermined price
- Demand for payment of principal and interest
- The payment of legal costs to ensure compliance
IX. Other Conditions
Anything not covered elsewhere.
SOURCE: Adapted from J. Timmons, New Venture Creation (Homewood, IL: Irwin, 1994): 774–777.