What are the conditions to closing of a Series A financing?
Takeaway: The common closing conditions for a Series A financing are receiving signatures to the financing documents from each investor, filing the charter in the company’s state of incorporation, and, sometimes, delivery by the company’s law firm of a legal opinion.
Series A financings are a crucial milestone for startups, as they often represent the first major institutional funding round. Before the financing can close, several conditions must be met by both the startup and the investors. In this post, we will discuss the common conditions to closing a Series A financing.
Execution of Definitive Agreements
Before closing a Series A financing, the startup and investors must execute or file definitive agreements, which typically include:
Investor Rights Agreement: This agreement covers various investor rights, such as registration rights, information rights, and rights of first refusal.
Voting Agreement: This agreement governs the voting arrangements for the election of the company's board of directors and other significant corporate matters.
Right of First Refusal and Co-Sale Agreement: This agreement establishes the procedures for transferring shares held by major stockholders.
Amended and Restated Certificate of Incorporation: This document sets forth the rights, preferences, and privileges of the preferred stock issued in the Series A financing. In addition to being signed by the company’s representative, this document needs to be filed with the state of the company’s incorporation, which is a process that can take anywhere from 1 hour to 3-4 days depending on the turnaround time you select.
Legal Opinion
Stock Purchase Agreements may require the company's legal counsel to provide a legal opinion addressing specific matters related to the financing, such as the valid issuance of the preferred stock, the company's good standing, and the enforceability of the definitive agreements.
No Material Adverse Change
Investors typically require that there be no material adverse change in the company's business, financial condition, or prospects between the signing of the SPA and the closing of the financing.
Good Standing
The startup must be in good standing with the state in which it is incorporated, and all required corporate filings must be up-to-date.
Regulatory Approvals
If the startup operates in a regulated industry or if the investment triggers specific regulatory requirements, the company must obtain all necessary regulatory approvals before closing.
Representations and Warranties
Both the startup and the investors must confirm that all representations and warranties made in the stock purchase agreement and other definitive agreements are accurate and complete as of the closing date.
Legal Compliance
The startup must ensure that it is in compliance with all applicable laws and regulations, including securities laws and employment laws.
Conclusion
Closing a Series A financing involves meeting several closing conditions, including the execution of definitive agreements, obtaining corporate approvals, providing a legal opinion, ensuring legal compliance, and confirming the accuracy of representations and warranties. Startups and investors should carefully review the stock purchase agreement and ensure that all closing conditions are satisfied to successfully close the financing.