How will a venture capital firm structure its investment?

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 will also contain exhibits and refer to related transaction documents that contain contractual rights in favor 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.

Venture capitalists also typically expect to receive the following rights with an investment:

The right to elect one or more directors to the company's Board of Directors

The right to receive various reports, financial statements and related information

The right to have its stock registered for sale in a public offering at the company's expense

The right to maintain its percentage share ownership in the company by participating in future stock offerings