Stock purchase agreement

The stock purchase agreement (SPA) is not a “one-size-fits-all” document. Nixon Peabody corporate attorneys discuss best practices as startups navigate the SPA document process.

The stock purchase agreement (SPA) is the initial document in the National Venture Capital Association (“NVCA“) Model Forms set. Understanding its provisions is crucial to the success of any venture financing transaction. The SPA outlines the agreement between the company issuing the securities and the investors purchasing them for cash, debt cancellation, or a combination of both. The SPA describes the fundamental terms of the deal, such as the amount raised, the valuation, the closing date, and the use of proceeds. It also contains representations and warranties from both parties, which are promises about the company's and investors' facts and circumstances at the time of closing.

Watch our NVCA document series webinar on stock purchase agreements.

Almost all venture capital SPAs are constructed starting with the model form provided by NVCA, which has become the industry standard for these transactions.

The NVCA SPA form is not a one-size-fits-all document and must be tailored to the specific company, investor, and, most importantly, the term sheet the company and the investor agreed to.

Here are some tips to help companies as they navigate SPA drafting process:

• Start with the term sheet. The term sheet is the non-binding document that outlines the main terms of the deal and serves as a roadmap for drafting the SPA and the other documents. Make sure the term sheet is clear, comprehensive, and consistent with your expectations and goals. Look for unique or special circumstances identified in the term sheet and anticipate that these may not be covered by the standard form.
• Review the capitalization table. The capitalization table is the roster of owners of the company's stock and is crucial for determining the price and the percentage of the company being sold. The capitalization table must include all the outstanding shares plus all the securities or instruments that could become shares, such as options, warrants, convertible notes, SAFEs, and other convertible securities. The capitalization table should also reflect the pre-money and post-money valuation of the company, as agreed to in the term sheet.
• Review each of the representations and warranties. The representations and warranties are the promises the company and the investors make to each other about their specific facts and circumstances at the time of the deal’s closing. They are important for providing information, allocating risk, and protecting rights. The representations and warranties are perpetual, meaning they last forever following the closing. There are no indemnification caps, so there is no contractual limit on the liability for a breach. It is essential to make accurate disclosures and include any exceptions or qualifications to the representations and warranties in the Disclosure Schedules, which are an attachment to the SPA, that provide additional information and details.
• Coordinate the closing deliverables. The closing deliverables are the documents and actions each party must provide or perform at the transaction's closing. The closing deliverables include the SPA and the other transaction documents, such as the charter, the voting agreement, the investor rights agreement, the indemnification agreement, the management rights letter, and the founder stock agreement. The closing deliverables also include the funds paid by the investors, the shares issued by the company, and any other certificates, opinions, or consents that may be required. The transaction's closing is simultaneous; there is no gap between signing and closing. Venture transactions tend to move and close quickly, and keeping and maintaining a checklist of all the closing deliverables from the beginning of the process is important.