What do definitive agreements for a Series A financing look like?

Takeaway: The primary documents in a preferred stock financing are the Stock Purchase Agreement, Investors’ Rights Agreement, Right of First Refusal and Co-Sale Agreement, the Voting Agreement, and the Certificate of Incorporation.

Successfully negotiating and signing a Series A term sheet is a major milestone for any startup founder. However, the journey doesn't end there – the next crucial step is the execution of definitive agreements that set the stage for a successful financing round. In this post, we will provide an overview of the key definitive agreements typically involved in a Series A financing and explain their significance in the fundraising process.

Amended and Restated Certificate of Incorporation (Charter)

The Amended and Restated Certificate of Incorporation is a critical document that sets forth the rights, preferences, and privileges of the newly issued preferred stock. It amends the company's existing certificate of incorporation and establishes the terms of the Series A preferred stock, including:

  • Dividend Rights: The rights of preferred stockholders to receive dividends, if any, and the conditions under which dividends will be paid.

  • Liquidation Preferences: The priority of preferred stockholders in receiving proceeds from a liquidity event, such as an acquisition or IPO.

  • Conversion Rights: The ability of preferred stockholders to convert their shares into common stock, including the conversion price and any anti-dilution protections.

  • Voting Rights: The voting rights of preferred stockholders on various corporate matters, such as mergers, acquisitions, or changes to the company's capital structure.

  • Protective Provisions: Specific rights granted to preferred stockholders to veto or approve certain corporate actions.

Stock Purchase Agreement (SPA)

The Stock Purchase Agreement is the primary document in any Series A financing. It outlines the terms and conditions under which investors agree to purchase the company's preferred stock. The SPA typically includes the following key provisions:

  • Purchase Price: The agreed-upon price per share of the preferred stock being sold in the financing round.

  • Closing Date: The date on which the transaction is expected to close, and the exchange of funds and shares will take place.

  • Representations and Warranties: Statements made by the company and investors to assure each party of the accuracy of information provided during negotiations. These include the company's financial position, legal compliance, and material contracts, among others.

  • Conditions to Closing: Certain conditions that must be met by both parties before the transaction can close, such as obtaining required consents or approvals.

Investors' Rights Agreement (IRA)

The Investors' Rights Agreement outlines certain rights and privileges granted to Series A investors, including:

  • Registration Rights: The rights of investors to demand the registration of their shares under the Securities Act of 1933, enabling them to sell their shares in the public market.

  • Information Rights: The rights of investors to receive periodic financial and operational information from the company.

  • Pro-Rata Rights: The rights of investors to participate in future financings and maintain their ownership percentage, as well as the ability to sell their shares alongside other shareholders in the event of a sale.

Right of First Refusal and Co-Sale Agreement (ROFR)

The Right of First Refusal and Co-Sale Agreement outlines the mechanism by which the company and the investors have the right to purchase shares proposed to be sold by the founders. The purpose of this is to incentivize the founders to retain their shares by making it more difficult to transfer them to third parties.

Voting Agreement (VA)

The Voting Agreement outlines the agreement between the parties with respect to the company’s board of directors and matters around selling the business, including:

  • Board Composition: The composition of the company's board of directors and the voting rights of shareholders with respect to board seats. This ensures that both founders and investors have representation on the board and can influence the company's strategic direction.

  • Drag-Along Rights: The rights of the investors to compel minority shareholders (e.g., the founders and employees) to participate in a sale or merger transaction.

Conclusion

Successfully navigating the Series A definitive agreements is a critical step in securing the necessary capital to scale your startup and pursue new growth opportunities. By understanding the purpose and key provisions of each document, founders can ensure they secure the most favorable terms possible for their company and foster a strong partnership with their Series A investors. It is essential to work closely with experienced legal counsel during this process to avoid potential pitfalls and ensure the proper execution of these agreements. With a solid foundation established through these definitive agreements, your startup will be well-positioned for continued success and growth in the competitive business landscape.