Venture Capital Stock Purchase Agreements

After the company and a venture capitalist agree on the term sheet, the definitive agreements reflecting the transaction are typically prepared. The main agreement is the venture capital Stock Purchase Agreement, which contains the following:

• The price of the stock to be sold and number of shares to be purchased
• The company's representations and warranties
• Various covenants by the company
• Conditions to closing the deal
• Exhibits and related agreements, which contain other rights for the venture capitalist

Sometimes the venture capitalist stages the investment — that is, some money is invested right away and then additional monies come as the company meets certain milestones. For the company's benefit, these milestones must be clearly defined and reasonably obtainable.

Most venture capital financings take the form of an agreement to sell convertible preferred stock to the venture capitalist. Because the stock is preferred stock, the venture capitalist gets preference over the common shareholders in the event of a liquidation or merger. Because the stock is convertible, the venture capitalist can convert the stock into common stock at its option. In certain events, such as an initial public offering (IPO) of the company, the convertible preferred stock automatically converts to common stock because this simplifies the company's capital structure and facilitates the IPO.