Series A Preferred Stock Purchase Agreement Checklist – Part I

By Drew Stevens - June 14, 2019 - Startups + VC

Things are moving for your startup: you’re clicking with your co-founders, your technology development is solid, and you just signed your first legitimate venture capital term sheet.

Before you rush to cash your investor’s check, there still remains some legal paperwork to wrap up your Series A round. One of the main documents that evidences your venture capital investment is most likely going to be the Series A Preferred Stock Purchase Agreement.

Here, our venture capital lawyer will break down some of the more important components and provisions of the typical preferred stock purchase agreement.

Issuing Series A Preferred Stock and Amending your Certificate of Incorporation

One of the leading provisions you’ll see in a Series A Preferred Stock Purchase Agreement is the agreement of your startup to sell and issue to the respective investors their Series A preferred stock, at the price agreed upon in your term sheet.

As a part of your startup issuing preferred stock, there may be a provision that states your startup will amend its certificate of incorporation.

You may ask, if you’ve already correctly registered and have a valid certificate of incorporation, why do you have to amend the certificate?

The certificate of incorporation will usually specify how many shares of stock your corporation is authorized to issue, the types of shares that have been issued (i.e. common), the par value per share, and how many classes of shares there are. In order to make the venture capital investment happen, your startup may be issuing additional shares, different types of shares (i.e. preferred), or even additional classes of shares (i.e. Class A and Class B). Thus, you’ll need to file an amended and restated certificate of incorporation to memorialize said changes.

Representations and Warranties of the Company

The investors in your startup, in deciding to throw you cash, are relying on your startup being organized and operated in a certain way. In the preferred stock purchase agreement, your company will make a number of representations and warranties. We’ll tackle some of the usual suspects below.

Organization and Good Standing

This provision usually has the startup signing off on the fact that the company is properly registered, operating, and in good standing in its home state of domicile. Additionally, if your startup has significant enough operations in other states, you’ll represent that you’re qualified to transact business as a foreign corporation in said jurisdiction(s).

For example, if you filed as a Delaware corporation, but your main operations and customer base are in Ohio, you probably should have filed Form 530A with the Ohio Secretary of State – the Foreign Nonprofit Corporation Application For License.

Authorization

Your incessantly annoying lawyer has probably nagged multiple times about the importance of maintaining your corporate documents and your corporate binder. You may have had to acknowledge there was a valid point here when, during due diligence, you were scrambling to make sure you had the last two years’ worth of directors’ meetings and actions recorded. This provision is just another nod at corporate formalities, stating that the company and its directors have taken all corporate action necessary to approve the issuance of the Series A preferred shares.

Capitalization

Usually for clarity and making sure everyone is on the same page, this section will stipulate how many shares of common stock and preferred stock are being issued. There are numerous variations and ancillary provisions that you’ll find in the capitalization section.

Some issue may include language related to voting rights, some provisions may stipulate if a certain amount of common stock has been reserved for an employee pool, and some variations also include securities and exemptions compliance. Finally, you may also see a provision regarding non qualified deferred compensation plans and compliance with IRS Code Section 409A.

Venture Capital Law Firm Columbus Ohio

Navigating the complexities of your first major preferred stock deal can be overwhelming. If you feel that you need assistance with your Series A round, contact our business attorney today.