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Cash Burn Clause
A provision that triggers certain actions if the target company�s cash reserves fall below a specified threshold during the M&A process, often included to protect the buyer.
Implications
A contractual provision that sets limits on the rate at which a company can spend its cash reserves, often used in investment agreements to protect investors and ensure financial discipline.
Example
Example: A venture capital firm includes a cash burn clause in its investment agreement with a startup, capping monthly expenditures to preserve capital until the next funding round.
Related Terms
Different from capital allocation strategies, which focus on where to spend, a cash burn clause controls the pace of spending to ensure sustainability and prevent premature depletion of funds.
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