When managing investments through AngelList, changes to material deal terms after your deal has gone live might require an "opt-out" process for Limited Partners (LPs). The SEC requires that LPs be informed of any changes to the deal that might materially affect their investment decisions.
The opt-out process is in place to ensure transparency and protect the interests of LPs. Since they initially committed to the deal based on specific terms, any significant change could alter the risk or return profile of their investment. Opt-outs provide LPs with the opportunity to reconsider their position and withdraw if they find the new terms unfavorable. Providing LPs with this opportunity helps maintain trust and reduces the risk of legal issues down the road.
What is an opt-out?
An opt-out is a process that allows LPs to review changes made to a deal after they’ve already committed and decide whether they still want to proceed with their investment. If any material changes occur in the deal, LPs are notified and given a window of time (typically 48 hours) to either accept or cancel their commitment.
When is an opt-out needed?
Opt-outs are generally required when there are material changes to the deal that could significantly alter the terms or structure that LPs originally agreed to. These changes could include, but are not limited to:
- Management fee adjustments: If the management fee increases or changes in any way that would raise the total fees for the LPs.
- Valuation changes: If the post-money valuation increases by more than 5% (and is not due to a round size adjustment), LPs must be notified because it could impact their ownership stake or dilution.
- Discount and share class changes: If a discount is removed or reduced or if the share class is changed (e.g., from preferred to common), which might impact the returns LPs expected.
- Instrument changes:
- If the deal switches from offering equity to a SAFE or convertible note.
- If a SAFE is converted into equity, or there are any changes to the investment instrument that might affect LP returns.
- Advisor changes: If there’s a change in the deal’s advisor (e.g., from AngelList-advised to self-advised).
- Carry percentage or hurdle changes: If the carry percentage or hurdle rate increases, which would result in a larger portion of the returns going to the Fund Lead, this would trigger an opt-out because it’s less favorable for LPs.
- Incorporation or location changes: If the company’s incorporation type changes (e.g., switching from a corporation to an LLC) or the company moves its incorporation to another country, it could affect the legal structure and tax implications for LPs.
How does the opt-out process work?
When an opt-out is required, LPs will be notified via email about the material changes. They are given a period of time to review the changes and decide whether they still want to proceed with their investment.
How it works in practice:
- Triggering an opt-out: If any unfavorable or significant material changes are made to your deal, you may need an opt-out.
- Fund lead notification: You’ll receive communication from AngelList requesting your confirmation to proceed with an opt-out.
- LP opt-out and decision: LPs will receive a message notifying them of the changes. LPs will have 48 hours to decide if they wish to continue with their commitment under the new terms. If they choose to opt-out, their investment will be canceled.
- Final confirmation: After the opt-out period ends, any LPs who did not opt-out will remain invested under the new terms.