Drop Dead Fee
Categories: Company Management
Courtesy of a mob boss, a drop dead fee is money a borrower must pay to a lender if the borrower’s deal to acquire a company falls though.
Like...there’s someone who wants to buy a business, but they don’t have the cash to buy it, so they take out a loan. If it turns out the borrower can’t buy it (maybe the company changes its mind, or sells to a higher bidder), then the borrower doesn’t need that loan after all. The drop dead fee is a fee that the loaning institution gets paid by the borrower, who comes back to the bank with his tail between his legs.
The borrower must return the money borrowed, along with a “sorry for the trouble, here’s some money of lost interest for you” fee. That is the drop dead fee. It's more common in the UK than the U.S., but it’s also a thing elsewhere in the world.
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Finance: What is a term sheet?10 Views
Finance a la shmoop what is a term sheet Horny
bulls inc is a genetic laboratory specializing in making really
long horned cattle They're raising money from investors to extend
their business into goats rams sheep and especially unicorn In
fact they hope teo be one someday inside silicon valley
Joke like eight people are now laughing really hard All
right The ceo calvin mick meet awaits the terms he'll
be offered for raising his be round of capital from
investors He signals the amount he wants around ten million
box But what matters to him are the terms under
which will raise that money like one term revolves around
how much are what percentage of his count pany that
ten million buys does ten million by half the company
like was a ten million dollar four And then they
put in ten And that buys half or was it
twenty before In the ten million buys a third Or
was it forty million before In adding ten minute buys
a fifth Or was it ninety million before in the
ten million ad buys a tenth Yeah well obviously he
wants to keep a cz much of the companies he
can for himself and for the other investors and for
the employees who have a you know a stake in
it Tight We'll stop doing that So one term is
the valuation Another term on the term sheet is the
type of stock that the investor wants to buy for
the ten million bucks she's probably putting in Is it
common stock Is it preferred stock Is it special convertible
preferred stock that carries a liquidity preference such that be
round investors might get like three times their money back
before everyone else gets a dime Yeah it's a another
set of terms Got it Alright Next term Is there
a board seat that comes with this investment Like the
people who are investing in this be round Do they
get a guaranteed board seat No matter how many shares
they own or what percentage of the company they own
that kind of thing Alright next term how big is
the option Cool to attract proven talent from the genetic
modification industry Like you gotta spend a lot of options
to get someone to leave genentech to come to a
risky little start up like this right Alright next term
Does the founder of the company get any special rights
or is he just a common shareholder like all the
other employees like does he have a guaranteed title or
a guaranteed job or some guaranteed hey out or or
some guaranteed set of steak knives or some like that
All right well lots more terms might be included in
this term sheet that he'll evaluate All right we didn't
stop did we And term sheets don't exist on ly
For investors buying stakes in companies they exist for basic
business deals as well so pretty simple But if you
can go back and watch this video again so that 00:02:46.66 --> [endTime] you're not utterly confused Oh my