The stock purchase agreement (SPA) is the central transaction document in a venture capital financing. It sets forth the sale (by the company) and purchase (by one ore more investors) of preferred stock of the company. Under the SPAthe company issues preferred shares in exchange for cashcancellation of debtconversion of certain securitiesor a combination thereof. The SPA specifies key deal terms such as the number of shares to be issuedthe price of such sharesand the dates of the closing (or closings).
Beyond the purchase mechanicsthe SPA references the contemporaneous execution and delivery of other NVCA model documentssuch as the investor rights agreementvoting agreementand right of first refusal and co-sale agreementas well as the filing of an amended and restated certificate of incorporation of the company—creating a comprehensive framework for the investment.
Watch our NVCA document series on the stock purchase agreement
Role of the term sheet
The term sheet serves as the roadmap for drafting the SPA and related documents. While non-bindingit outlines the economic and legal terms of the transactionincluding investment amountprice per shareclass of securitiesand timing for closings. It often includes a capitalization table showing post-financing ownership and may highlight specific conditions to closingsuch as required regulatory approvals. Although only confidentiality and exclusivity provisions are bindingthe term sheet sets expectations for the final transaction and is notby itselfan enforceable document.
Capitalization table
Accurate cap table management is critical. This table sets forth the share ownership of the company by class of security—common stockpreferred stockoptionswarrantsand convertible instruments like SAFEs or convertible noteson both an outstanding and a fully-diluted basis. Investors focus on ownership on a fully diluted-basiswhich assumes all options and convertible instruments are exercised into shares. Preparing both a pre-money and post-money pro forma cap table ensures clarity on ownership after the financing closes.
Representations and warranties
The SPA includes representations and warranties from both the company and investors. For the companyrepresentations and warranties are generally included to confirm legal existenceauthority to issue sharesvalid issuanceand compliance with laws. The representations and warranties also cover areas such as litigationintellectual propertyemployment mattersand capitalization. Disclosure schedules allow the company to note exceptions to the representations and warranties and provide investors further diligence points to consider.
The NVCA model SPA includes optional or bracketed reps addressing industry-specific or situational concernssuch as healthcare complianceexport controlsdata privacyand foreign ownership. Increasinglyprovisions like Qualified Small Business Stock (QSBS) and data privacy require careful review due to their complexity and regulatory implications.
Investor representations focus on confirming authority to investaccredited investor statusand acknowledgment of securities law restrictions. They also include assurances about foreign person status and an exculpation clausewhich clarifies that each investor relies on its own diligence rather than other syndicate members. Conversion of any outstanding SAFEs or convertible notes is documented within the SPA to ensure all instruments are properly addressed.
Conditions to closing
Closing conditions typically include delivery of all NVCA model documentsthe filing of the amended charterofficer certificatescompliance certificatesdisclosure schedulesand an opinion of counsel. Additional deliverablessuch as founder agreements or management rights lettersshould be identified early to avoid delays. Venture financings generally involve simultaneous signing and closingso all documents and schedules must be finalized and dated as of the closing datewith funds being delivered upon the mutual exchange of executed agreements.
Miscellaneous provisions
The SPA concludes with provisions on governing law (commonly Delaware)amendment mechanicsfee reimbursementsand dispute resolution. Attention to these details ensures alignment across all transaction documents.
FAQs: Understanding the SPA
What is the purpose of the SPA in a venture capital financing?
The SPA is the primary transaction document that governs the sale and purchase of preferred stock between a company and its investors. It sets out the number and price of sharesclosing mechanicsrepresentations and warrantiesand integrates other key agreements like the investor rights agreement and voting agreement to form a complete investment framework.
Why is the capitalization table important in the stock purchase agreement process?
The capitalization table shows the company’s ownership structure before and after the financingincluding common stockpreferred stockoptionsand convertible instruments. Investors rely on this to confirm their percentage ownership on a fully diluted basis. Accurate cap table management is essential for calculating valuationpurchase priceand ensuring transparency in ownership.
What are disclosure schedules in the stock purchase agreement processand why do they matter?
Disclosure schedules accompany the company’s representations and warranties in the SPA. They provide an opportunity for the company to disclose exceptions to the representations and warranties or provide details that make those statements accurate. For investorsthese schedules serve as a key diligence toolhelping identify risks and verify information in a fast-moving venture deal where extensive diligence may not occur.