How Do Venture Capital Firms Structure Their Investments?

Most venture capitalists generally take preferred stock in

a corporation in exchange for their investment dollars and typically expect to receive certain rights regarding their investment, including the right to elect one or more directors to the corporation's board of directors; the right to receive a liquidation preference over common shareholders in the event of a sale of the company; the right to receive a price adjustment if the company sells additional stock at a price lower than the price the venture capitalists paid; and the right to receive financial and other corporate reports and information.

A venture capital stock purchase agreement tends to contain the following:

The price of the stock to be sold and number of shares to be purchased

Representations and warranties by the company about the condition of the business

Various covenants by the company

Conditions to closing the deal

The stock purchase agreement also contains exhibits and refers to related transaction documents that contain contractual rights in favor of the venture capitalists.

Sometimes venture capitalists stage their investments, that is, some money is invested right away and then additional monies come in as the company meets certain milestones. For the company's benefit, these milestones should be clearly defined and reasonably obtainable.