Having a new lead outside investor substantially improves the legal risk in a down round financing. In most cases, the outside investor acting as lead will agree to invest the largest amount of money in the round, will perform the diligence necessary to set the valuation and pricing, and will dictate the terms of the transaction, including the amount of additional investment required or permitted of the inside investors. In these circumstances, even where the new financing is at a reduced valuation, the conflict of interest issues are normally eliminated. A rights offering is typically not considered necessary, although the company may still conduct one in order to solicit additional investor investor interest. Disinterested board and disinterested stockholder approval procedures are typically not necessary, although following them will also decrease risk.
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