If you`re involved in the business world, you`ve likely heard the term “knockout agreement” thrown around. But what does it actually mean?
A knockout agreement is a type of term sheet or agreement between a company and its investors. In essence, it sets out certain terms and conditions for future investments in the company.
The key feature of a knockout agreement is that it includes a “knockout clause.” This clause states that if a particular investor cannot meet certain criteria (such as financial stability or regulatory approval) within a specified timeframe, their investment will be “knocked out” and the company can move forward with other potential investors.
The purpose of the knockout agreement is to protect the company from potential delays or roadblocks caused by a problematic investor. It also serves to encourage serious investors to meet the necessary criteria and ensure that the company has a reliable source of funding.
In addition to the knockout clause, a typical knockout agreement will outline other terms related to the investment, such as the amount being invested, the valuation of the company, and any restrictions or limitations on the investor`s rights.
While knockout agreements can be useful for companies seeking investment, it`s important to note that they can also present risks for investors. If an investor is unable to meet the criteria outlined in the agreement, they could lose their investment without any recourse.
Overall, the knockout agreement is a valuable tool for companies looking to secure reliable funding and protect themselves from potential roadblocks. However, both companies and investors should carefully consider the terms of any such agreement before signing on the dotted line.