SERIES A PREFERRED STOCK PURCHASE AGREEMENT
Preliminary Note
The Stock Purchase Agreement sets forth the basic terms of the purchase and sale of the
preferred stock to the investors (such as the purchase price, closing date, conditions to closing)
and identifies the other financing documents. Generally this agreement does not set forth either
(1) the characteristics of the stock being sold (which are defined in the Certificate of
Incorporation) or (2) the relationship among the parties after the closing, such as registration
rights, rights of first refusal and co-sale, voting arrangements (these matters often implicate
other persons than just the Company and the investors in this round of financing, and are usually
embodied in separate agreements to which those others persons are parties, or in some cases by
the Certificate of Incorporation). The main items of negotiation in the Stock Purchase Agreement
are therefore the price and number of shares being sold, and the representations and warranties
that the Company, and sometimes the Founders as well, must make to the investors.
TABLE OF CONTENTS
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Page
1. Purchase and Sale of Preferred Stock ..................................................................................1
Sale and Issuance of Series A Preferred Stock ........................................................1
Closing; Delivery .....................................................................................................1
Sale of Additional Shares of Preferred Stock ..........................................................2
[Use of Proceeds].....................................................................................................3
Defined Terms Used in this Agreement...................................................................3
2. Representations and Warranties of the Company................................................................5
Organization, Good Standing, Corporate Power and Qualification ........................6
Capitalization ...........................................................................................................6
Subsidiaries ..............................................................................................................8
Authorization ...........................................................................................................8
Valid Issuance of Shares..........................................................................................9
Governmental Consents and Filings ........................................................................9
Litigation..................................................................................................................9
Intellectual Property...............................................................................................10
Compliance with Other Instruments ......................................................................12
Agreements; Actions..............................................................................................12
Certain Transactions ..............................................................................................13
Rights of Registration and Voting Rights..............................................................14
Property..................................................................................................................14
Financial Statements ..............................................................................................14
Changes..................................................................................................................15
Employee Matters ..................................................................................................16
Tax Returns and Payments.....................................................................................18
Insurance ................................................................................................................18
Employee Agreements ...........................................................................................18
Permits ...................................................................................................................19
Corporate Documents ............................................................................................19
[83(b) Elections] ....................................................................................................19
[Real Property Holding Corporation] ....................................................................19
Environmental and Safety Laws ............................................................................19
[Qualified Small Business Stock] ..........................................................................20
Disclosure ..............................................................................................................21
[Small Business Concern]......................................................................................21
[Foreign Corrupt Practices Act].............................................................................21
[Data Privacy] ........................................................................................................22
3. Representations and Warranties of the Purchasers ............................................................22
Authorization .........................................................................................................22
Purchase Entirely for Own Account ......................................................................23
Disclosure of Information ......................................................................................23
Restricted Securities...............................................................................................23
No Public Market...................................................................................................24
Legends ..................................................................................................................24
Accredited Investor................................................................................................24
Foreign Investors ...................................................................................................24
No General Solicitation..........................................................................................25
Exculpation Among Purchasers.............................................................................25
Residence ...............................................................................................................25
[Consent to Promissory Note Conversion and Termination].................................25
4. Conditions to the Purchasers’ Obligations at Closing .......................................................26
Representations and Warranties.............................................................................26
Performance ...........................................................................................................26
Compliance Certificate ..........................................................................................26
Qualifications.........................................................................................................26
Opinion of Company Counsel ...............................................................................27
Board of Directors..................................................................................................27
Indemnification Agreement ...................................................................................27
Investors’ Rights Agreement .................................................................................27
Right of First Refusal and Co-Sale Agreement .....................................................27
Voting Agreement..................................................................................................27
Restated Certificate................................................................................................27
Secretary’s Certificate............................................................................................27
Proceedings and Documents ..................................................................................27
Minimum Number of Shares at Initial Closing......................................................28
Management Rights ...............................................................................................28
[SBA Matters]........................................................................................................28
[Preemptive Rights] ...............................................................................................28
5. Conditions of the Company’s Obligations at Closing .......................................................28
Representations and Warranties.............................................................................28
Performance ...........................................................................................................28
Qualifications.........................................................................................................28
Investors’ Rights Agreement .................................................................................28
Right of First Refusal and Co-Sale Agreement .....................................................28
Voting Agreement..................................................................................................29
[Minimum Number of Shares at Initial Closing]...................................................29
6. Miscellaneous ....................................................................................................................29
Survival of Warranties ...........................................................................................29
Successors and Assigns..........................................................................................29
Governing Law ......................................................................................................29
Counterparts...........................................................................................................29
Titles and Subtitles.................................................................................................29
Notices ...................................................................................................................30
No Finder’s Fees ....................................................................................................30
Fees and Expenses .................................................................................................30
[Attorneys’ Fees] ...................................................................................................30
Amendments and Waivers .....................................................................................30
Severability ............................................................................................................31
Delays or Omissions ..............................................................................................31
Entire Agreement ...................................................................................................31
[Corporate Securities Law] ....................................................................................31
Dispute Resolution.................................................................................................32
[No Commitment for Additional Financing] .........................................................33
[Waiver of Conflicts] .............................................................................................33
Exhibit A - SCHEDULE OF PURCHASERS
Exhibit B - FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Exhibit C - DISCLOSURE SCHEDULE
Exhibit D - FORM OF INDEMNIFICATION AGREEMENT
Exhibit E - FORM OF INVESTORS’ RIGHTS AGREEMENT
Exhibit F - FORM OF MANAGEMENT RIGHTS LETTER
Exhibit G - FORM OF RIGHT OF FIRST REFUSAL AND CO-SALE
AGREEMENT
Exhibit H - FORM OF VOTING AGREEMENT
Exhibit I - FORM OF LEGAL OPINION OF [COMPANY COUNSEL]
[Exhibit J - MILESTONE EVENTS]
ADDENDUM TO STOCK PURCHASE AGREEMENT: SAMPLE FOUNDER
REPRESENTATIONS AND WARRANTIES
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (this
“Agreement”), is made as of the [__] day of [________, 20_] by and among [____________], a
Delaware corporation (the “Company”), the investors listed on Exhibit A attached to this
Agreement (each a “Purchaser” and together the “Purchasers”) [and the persons listed as
“Founders” on the signature pages to this Agreement (each a “Founder” and together the
“Founders”)].
The parties hereby agree as follows:
1. Purchase and Sale of Preferred Stock.
Sale and Issuance of Series A Preferred Stock.
(a) The Company shall adopt and file with the Secretary of State of the
State of Delaware on or before the Initial Closing1 (as defined below) the Amended and Restated
Certificate of Incorporation in the form of Exhibit B attached to this Agreement (the “Restated
Certificate”).2
(b) Subject to the terms and conditions of this Agreement, each
Purchaser agrees to purchase at the Closing and the Company agrees to sell and issue to each
Purchaser at the Closing that number of shares of Series A Preferred Stock, $ [__] par value per
share (the “Series A Preferred Stock”), set forth opposite each Purchaser’s name on Exhibit A,
at a purchase price of $[__] per share. The shares of Series A Preferred Stock issued to the
Purchasers pursuant to this Agreement (including any shares issued at the Initial Closing and any
[Milestone Shares or] Additional Shares, as defined below) shall be referred to in this Agreement
as the “Shares.”
Closing; Delivery.
(a) The initial purchase and sale of the Shares shall take place
remotely via the exchange of documents and signatures, at [____] [_].m., on [________ __, 20_],
or at such other time and place as the Company and the Purchasers mutually agree upon, orally
or in writing (which time and place are designated as the “Initial Closing”).3 In the event there
is more than one closing, the term “Closing” shall apply to each such closing unless otherwise
specified.
(b) At each Closing, the Company shall deliver to each Purchaser a
certificate representing the Shares being purchased by such Purchaser at such Closing against
payment of the purchase price therefor by check payable to the Company, by wire transfer to a
1 If only one closing is contemplated, references to “Initial Closing,” “each Closing,” “such
Closing” etc. should be modified.
2 Sometimes only a Certificate of Amendment is required.
3 If the Agreement is signed prior to the Closing, this provision gives the parties flexibility to
change the closing date as contingencies arise. As a practical matter, however, the Agreement is usually signed on
the date of the Closing. This means that, until the Closing, everyone has an opportunity to back out of the deal.
bank account designated by the Company, by cancellation or conversion of indebtedness of the
Company to Purchaser[, including interest4], or by any combination of such methods.
Sale of Additional Shares of Preferred Stock.
(a) After the Initial Closing, the Company may sell, on the same terms
and conditions as those contained in this Agreement5, up to [_________] additional shares
(subject to appropriate adjustment in the event of any stock dividend, stock split, combination or
similar recapitalization affecting such shares) of Series A Preferred Stock (the “Additional
Shares”), to one or more purchasers (the “Additional Purchasers”) [reasonably acceptable to
Purchasers holding a [specify percentage] of the then outstanding Shares6], provided that (i) such
subsequent sale is consummated prior to [90] days after the Initial Closing (ii) each Additional
Purchaser shall become a party to the Transaction Agreements (as defined below) (other than the
Management Rights Letter), by executing and delivering a counterpart signature page to each of
the Transaction Agreements[; and (iii) [_________], counsel for the Company, provides an
opinion dated as of the date of such Closing that the offer, issuance, sale and delivery of the
Additional Shares to the Additional Purchasers do not require registration under the Securities
Act of 1933, as amended, or applicable state securities laws]. Exhibit A to this Agreement shall
be updated to reflect the number of Additional Shares purchased at each such Closing and the
parties purchasing such Additional Shares.
(b) [After the Initial Closing, the Company shall sell, and the
Purchasers shall purchase, on the same terms and conditions as those contained in this
Agreement, up to [_____________] additional shares of Series A Preferred Stock (the
“Milestone Shares”), pro rata in accordance with the number of Shares being purchased by
each such Purchaser at all prior Closings, on the certification by the [Board] [Purchasers] that the
events specified in Exhibit J attached to this Agreement have occurred (the “Milestone Events”).
4 If some or all of the Purchasers will be converting previously issued notes to Shares, consider
paying the interest in cash, if the terms of the notes permit this, to avoid last-minute recomputations if the closing is
delayed. Note that cancellation of interest in return for stock may be a taxable event in the amount of the interest
cancelled. Accordingly, some of the Purchasers may require payment of interest in cash to avoid imputation of
income without the corresponding payment of cash to pay the tax.
5 The Company will often try to negotiate a “cushion” in the negotiated limit of the number of
preferred shares in order to permit it to issue additional shares of preferred stock in transactions outside the
financing, ., warrants for preferred stock issued in connection with an equipment financing. The language “on
the same terms and conditions as those contained in this Agreement” is flexible enough to permit this. If the
investors want to limit the number of preferred shares to be issued to those preferred shares issued in the financing,
the language “pursuant to this Agreement” should be substituted.
6 The Company may want to limit this approval right to the larger Purchasers. As an alternative, the
Agreement may specify that Additional Purchasers must be approved by the Board of Directors, including the
directors elected by the Series A Preferred Stockholders.
The date of the purchase and sale of the Milestone Shares are referred to in this Agreement as the
“Milestone Closing.”7]
[Use of Proceeds. In accordance with the directions of the Company’s
Board of Directors, as it shall be constituted in accordance with the Voting Agreement, the
Company will use the proceeds from the sale of the Shares for product development and other
general corporate purposes.]
Defined Terms Used in this Agreement. In addition to the terms defined
above, the following terms used in this Agreement shall be construed to have the meanings set
forth or referenced below.
(a) “Affiliate” means, with respect to any specified Person, any other
Person who, directly or indirectly, controls, is controlled by, or is under common control with
such Person, including, without limitation, any general partner, managing member, officer or
director of such Person or any venture capital fund now or hereafter existing that is controlled by
one or more general partners or managing members of, or shares the same management company
with, such Person.
(b) “Code” means the Internal Revenue Code of 1986, as amended.
(c) “Company Intellectual Property” means all patents, patent
applications, trademarks, trademark applications, service marks, service mark applications,
tradenames, copyrights, trade secrets, domain names, mask works, information and proprietary
rights and processes, similar or other intellectual property rights, subject matter of any of the
foregoing, tangible embodiments of any of the foregoing, licenses in, to and under any of the
foregoing, and any and all such cases [that are owned or used by] [as are necessary to] the
Company in the conduct of the Company’s business as now conducted and as presently proposed
to be conducted.
(d) “Indemnification Agreement” means the agreement between the
Company and the director [and Purchaser Affiliates]8 designated by any Purchaser entitled to
designate a member of the Board of Directors pursuant to the Voting Agreement, dated as of the
date of the Initial Closing, in the form of Exhibit D attached to this Agreement.
(e) “Investors’ Rights Agreement” means the agreement among the
Company and the Purchasers9 [and certain other stockholders of the Company] dated as of the
date of the Initial Closing, in the form of Exhibit E attached to this Agreement.
7 Consider whether the obligations of each Purchaser at a Milestone Closing are conditioned on (i)
the representations and warranties remaining true (or materially so) as of such Milestone Closing, (ii) each other
Purchaser purchasing shares at the Milestone Closing (., if one Purchaser breaches then no others are obligated),
and (iii) any other conditions. In a tranched milestone funding, investors should confirm with their accountants prior
to the first closing that the initial and later tranches will not be treated as separate instruments for purposes of ASC
480 based on the specific structure of the transaction.
8 See Model Indemnification Agreement for discussion of the issue of expanding coverage to
include not just VC designee director, but also the fund(s) making the investment.
9 In Series A Preferred Stock financings, the Investors’ Rights Agreement will normally be signed
by all the Series A Purchasers. In subsequent financing rounds, the standard practice is to amend and restate the
(f) “Key Employee” means any executive-level employee (including
division director and vice president-level positions) as well as any employee or consultant who
either alone or in concert with others develops, invents, programs or designs any Company
Intellectual
(g) “Knowledge” including the phrase “to the Company’s
knowledge” shall mean the actual knowledge [after reasonable investigation] of the following
officers: [specify names].11
(h) “Management Rights Letter” means the agreement between the
Company and [Purchaser], dated as of the date of the Initial Closing, in the form of Exhibit F
attached to this Agreement.
(i) “Material Adverse Effect” means a material adverse effect on the
business, assets (including intangible assets), liabilities, financial condition, property, prospects12
or results of operations of the Company.
(j) “Person” means any individual, corporation, partnership, trust,
limited liability company, association or other entity.
(k) “Purchaser” means each of the Purchasers who is initially a party
to this Agreement and any Additional Purchaser who becomes a party to this Agreement at a
subsequent Closing under Subsection .
(l) “Right of First Refusal and Co-Sale Agreement” means the
agreement among the Company, the Purchasers, and certain other stockholders of the Company,
dated as of the date of the Initial Closing, in the form of Exhibit G attached to this Agreement.
(m) “Securities Act” means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
(n) “Shares” means the shares of Series A Preferred Stock issued at
the Initial Closing and any [Milestone Shares or] Additional Shares issued at a subsequent
Closing under Subsection .
Investor Rights Agreement, which will then be signed by the Company as well as the subsequent and prior round
purchasers.
10 In a Series A round at a high-tech start-up, it is likely that the only key employees in addition to
management, if any, are those who are responsible for developing the Company’s key intellectual property assets. It
may be simpler for these early-stage companies to list the Key Employees by name. In later rounds, it may be
appropriate to include others, ., important salespeople or consultants and define Key Employees by function (.,
division director).
11 An important point of negotiation is often whether the Company will represent that a given fact (a)
is true or (b) is true to the Company’s knowledge. Alternative (a) requires the Company to bear the entire risk of the
truth or falsity of the represented fact, regardless whether the Company knew (or could have known) at the time of
the representation whether or not the fact was true. Alternative (b) is preferable from the Company’s standpoint,
since it holds the Company responsible only for facts of which it is actually aware.
12 Since the prospects of high-tech start-up companies are by definition highly uncertain, the
Company may resist the inclusion of the word “prospects” on the grounds that investors in a Series A financing are
in the business of shouldering that risk.
(o) “Transaction Agreements” means this Agreement, the Investors’
Rights Agreement, the Management Rights Letter, the Right of First Refusal and Co-Sale
Agreement, the Voting Agreement and [list any other agreements, instruments or documents
entered into in connection with this Agreement].
(p) “Voting Agreement” means the agreement among the Company,
the Purchasers and certain other stockholders of the Company, dated as of the date of the Initial
Closing, in the form of Exhibit H attached to this Agreement.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Purchaser that, except as set forth on the Disclosure Schedule
attached as Exhibit C to this Agreement, which exceptions shall be deemed to be part of the
representations and warranties made hereunder, the following representations are true and
complete as of the date of the Initial Closing, except as otherwise indicated. The Disclosure
Schedule shall be arranged in sections corresponding to the numbered and lettered sections and
subsections contained in this Section 2, and the disclosures in any section or subsection of the
Disclosure Schedule shall qualify other sections and subsections in this Section 2 only to the
extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to
such other sections and
For purposes of these representations and warranties (other than those in
Subsections , , , and ), the term the “Company” shall include any subsidiaries of
the Company, unless otherwise noted herein.
Organization, Good Standing, Corporate Power and The
Company is a corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to carry on its
business as presently conducted and as proposed to be conducted. The Company is duly
13 The purpose of the Company’s representations is primarily to create a mechanism to ensure full
disclosure about the Company’s organization, financial condition and business to the investors. The Company is
required to list any deviations from the representations on a Disclosure Schedule, the preparation and review of
which drives the due diligence process on both sides of the deal. For subsequent closings, changes to the Disclosure
Schedule are sometimes simply referenced on the Compliance Certificate. The introductory paragraph to this
Section 2 may be modified to permit an update to the Disclosure Schedule that would be reasonably acceptable to
each of the Purchasers. If this modification is made, a closing condition should be added to indicate that the updated
Disclosure Schedule will be delivered and that each of the Purchasers may refuse to close if the updated Disclosure
Schedule is reasonably unacceptable to that Purchaser. If there is to be a Milestone Closing, specific representations
and warranties to be true as of the Milestone Closing date may need to be negotiated. Some practitioners prefer to
deliver the Disclosure Schedule separately, instead of as an exhibit to the Stock Purchase Agreement, so that the
Disclosure Schedule will not have to be publicly filed in the event the Stock Purchase Agreement is filed as an
exhibit to a public offering registration statement.
14 The purpose of this representation is to ensure that basic corporate maintenance has been properly
carried out by the Company. Note that the Company is required to disclose failure to qualify in other jurisdictions
where it does business only if failure to do so could have a “Material Adverse Effect”; the purpose of this language
is to eliminate the time and expense of doing a state-by-state analysis to determine whether the Company should
technically be qualified. If the Company has material connections to states in which it is not qualified, these states
must be investigated by counsel to determine whether qualification is necessary and whether there are potential
adverse effects of having failed to qualify.
qualified to transact business and is in good standing in each jurisdiction in which the failure to
so qualify would have a Material Adverse Effect.
(a) The authorized capital of the Company consists, immediately prior
to the Initial Closing, of:
(i) [__________] shares of common stock, $[____] par value
per share (the “Common Stock”), [_________] shares of which are issued and outstanding
immediately prior to the Initial Closing. All of the outstanding shares of Common Stock have
been duly authorized, are fully paid and nonassessable and were issued in compliance with all
applicable federal and state securities laws. [The Company holds no Common Stock in its
treasury.]
(ii) [__________] shares of Preferred Stock, of which
[__________] shares have been designated Series A Preferred Stock, none of which are issued
and outstanding immediately prior to the Initial Closing. The rights, privileges and preferences
of the Preferred Stock are as stated in the Restated Certificate and as provided by the Delaware
General Corporation Law. [The Company holds no Preferred Stock in its treasury.]
(b) The Company has reserved [__________] shares of Common
Stock for issuance to officers, directors, employees and consultants of the Company pursuant to
its [Plan Year] Stock [Option] Plan duly adopted by the Board of Directors and approved by the
Company stockholders (the “Stock Plan”). Of such reserved shares of Common Stock,
[__________] shares have been issued pursuant to restricted stock purchase agreements, options
to purchase [__________] shares have been granted and are currently outstanding, and
[__________] shares of Common Stock remain available for issuance to officers, directors,
employees and consultants pursuant to the Stock Plan. The Company has furnished to the
Purchasers complete and accurate copies of the Stock Plan and forms of agreements used
thereunder.
(c) Subsection (c) of the Disclosure Schedule sets forth the
capitalization of the Company immediately following the Initial Closing including the number of
shares of the following: (i) issued and outstanding Common Stock, including, with respect to
restricted Common Stock, vesting schedule and repurchase price; (ii) granted stock options,
including vesting schedule and exercise price; (iii) shares of Common Stock reserved for future
award grants under the Stock Plan; (iv) each series of Preferred Stock; and (v) warrants or stock
purchase rights, if Except for (A) the conversion privileges of the Shares to be issued
15 Subsection describes the Company’s capital structure and can be stated either immediately
prior to or upon the Initial Closing of the financing. This description details any outstanding rights or privileges
with respect to the Company’s securities. In later round financings, this description would also list any co-sale
rights and rights of first refusal granted to investors in prior rounds. In later round financings, consider adding
representations that there have been no conversions of previously-issued preferred stock to common stock, the
number of shares that would be outstanding on an as-converted-to-common stock basis and the current conversion
ratios of each series of preferred stock.
16 Some practitioners prefer to delete this representation, provided the capitalization table is a
separate document.
under this Agreement, (B) the rights provided in Section 4 of the Investors’ Rights Agreement,
and (C) the securities and rights described in Subsection (b) of this Agreement and Subsection
(c) of the Disclosure Schedule, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally
or in writing, to purchase or acquire from the Company any shares of Common Stock or Series A
Preferred Stock, or any securities convertible into or exchangeable for shares of Common Stock
or Series A Preferred Stock. All outstanding shares of the Company’s Common Stock and all
shares of the Company’s Common Stock underlying outstanding options are subject to (i) a right
of first refusal in favor of the Company upon any proposed transfer (other than transfers for
estate planning purposes); and (ii) a lock-up or market standoff agreement of not less than one
hundred eighty (180) days following the Company’s initial public offering pursuant to a
registration statement filed with the Securities and Exchange Commission under the Securities
Act.
(d) None of the Company’s stock purchase agreements or stock option
documents contains a provision for acceleration of vesting (or lapse of a repurchase right) or
other changes in the vesting provisions or other terms of such agreement or understanding upon
the occurrence of any event or combination of events, including without limitation in the case
where the Company’s Stock Plan is not assumed in an acquisition. The Company has never
adjusted or amended the exercise price of any stock options previously awarded, whether
through amendment, cancellation, replacement grant, repricing, or any other means. Except as
set forth in the Restated Certificate, the Company has no obligation (contingent or otherwise) to
purchase or redeem any of its capital stock.
(e) [409A. The Company believes in good faith that any “nonqualified
deferred compensation plan” (as such term is defined under Section 409A(d)(1) of the Code and
the guidance thereunder) under which the Company makes, is obligated to make or promises to
make, payments (each, a “409A Plan”) complies in all material respects, in both form and
operation, with the requirements of Section 409A of the Code and the guidance thereunder. To
the knowledge of the Company, no payment to be made under any 409A Plan is, or will be,
subject to the penalties of Section 409A(a)(1) of the Code.]17
(f) The Company has obtained valid waivers of any rights by other
parties to purchase any of the Shares covered by this Agreement.
The Company does not currently own or control, directly
or indirectly, any interest in any other corporation, partnership, trust, joint venture, limited
17 It should be noted that the consensus among the NVCA drafting group was that the 409A issues
are better dealt with as a diligence item, rather than a company rep. Nevertheless, this rep is included here because
it is in any case important that the issue be surfaced as part of the financing, to ensure that the company is mindful of
the obligations and potential penalties imposed by 409A as it makes future equity grants. Inserting the rep in the
first draft, as a discussion item, is one way to ensure that the issue is not neglected.
18 The purpose of this representation is to require the Company to fully disclose its structure,
including other corporations, if any, that it controls. If the Company does have subsidiaries, you should (i) add to
Subsection a representation with respect to the subsidiaries of the Company modeled after Subsection
regarding the organization, good standing and qualification of each such subsidiary, and (ii) add a reference to
subsidiaries where appropriate in Section 2. Some formulations include subsidiaries in the definition of the
Company, this approach works if careful attention is given to representations where the effect of such inclusion
liability company, association, or other business entity. The Company is not a participant in any
joint venture, partnership or similar arrangement.
All corporate action required to be taken by the
Company’s Board of Directors and stockholders in order to authorize the Company to enter into
the Transaction Agreements, and to issue the Shares at the Closing and the Common Stock
issuable upon conversion of the Shares, has been taken or will be taken prior to the Closing. All
action on the part of the officers of the Company necessary for the execution and delivery of the
Transaction Agreements, the performance of all obligations of the Company under the
Transaction Agreements to be performed as of the Closing, and the issuance and delivery of the
Shares has been taken or will be taken prior to the Closing. The Transaction Agreements, when
executed and delivered by the Company, shall constitute valid and legally binding obligations of
the Company, enforceable against the Company in accordance with their respective terms except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, or other laws of general application relating to or affecting the enforcement of
creditors’ rights generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies, or (iii) to the extent the
indemnification provisions contained in the Investors’ Rights Agreement and the Indemnification
Agreement may be limited by applicable federal or state securities laws.
Valid Issuance of The Shares, when issued, sold and delivered
in accordance with the terms and for the consideration set forth in this Agreement, will be validly
issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on
transfer under the Transaction Agreements, applicable state and federal securities laws and liens
or encumbrances created by or imposed by a Purchaser. Assuming the accuracy of the
representations of the Purchasers in Section 3 of this Agreement and subject to the filings
described in Subsection (ii) below, the Shares will be issued in compliance with all applicable
federal and state securities laws. The Common Stock issuable upon conversion of the Shares has
been duly reserved for issuance, and upon issuance in accordance with the terms of the Restated
Certificate, will be validly issued, fully paid and nonassessable and free of restrictions on transfer
other than restrictions on transfer under the Transaction Agreements, applicable federal and state
securities laws and liens or encumbrances created by or imposed by a Purchaser. Based in part
upon the representations of the Purchasers in Section 3 of this Agreement, and subject to
requires additional language (for example, the representation in Subsection would require either the exclusion of
subsidiaries or a separate paragraph regarding the capitalization of subsidiaries).
19 In certain jurisdictions, ancillary agreements executed in connection with the financing, such as
noncompetition provisions or voting agreements, may be subject to some question regarding their enforceability,
and the representation should be modified accordingly.
20 The representations in Subsections and are intended to ensure that the Company has taken
all steps necessary to issue the preferred stock in accordance with applicable corporate law. This means that, before
the closing, the Company must (A) obtain the requisite stockholder and board approvals to amend the Certificate of
Incorporation and issue the stock; (B) file the Restated Certificate; and (C) obtain any other stockholder consents or
waivers required pursuant to the Restated Certificate, Bylaws, and existing agreements with securityholders (most
importantly, waivers to any existing rights of first offer or refusal). Subsection also requires the Company to
disclose any restrictions on transfer other than those contained in the Transaction Agreements (such as any
contained in the Restated Certificate and Bylaws, or any preemptive rights contained in agreements with other
securityholders).
Subsection below, the Common Stock issuable upon conversion of the Shares will be issued
in compliance with all applicable federal and state securities laws.
Governmental Consents and Filings. Assuming the accuracy of the
representations made by the Purchasers in Section 3 of this Agreement, no consent, approval,
order or authorization of, or registration, qualification, designation, declaration or filing with,
any federal, state or local governmental authority is required on the part of the Company in
connection with the consummation of the transactions contemplated by this Agreement, except
for (i) the filing of the Restated Certificate, which will have been filed as of the Initial Closing,
and (ii) filings pursuant to Regulation D of the Securities Act, and applicable state securities
laws, which have been made or will be made in a timely manner.
There is no claim, action, suit, proceeding, arbitration,
complaint, charge or investigation22 pending or to the Company’s knowledge, currently
threatened [in writing] (i) against the Company or any officer, director or Key Employee of the
Company [arising out of their employment or board relationship with the Company][; or] (ii) [to
the Company’s knowledge,] that questions the validity of the Transaction Agreements or the
right of the Company to enter into them, or to consummate the transactions contemplated by the
Transaction Agreements[; or (iii) to the Company’s knowledge, that would reasonably be
expected to have, either individually or in the aggregate, a Material Adverse Effect]. Neither the
Company nor, to the Company’s knowledge, any of its officers, directors or Key Employees is a
party or is named as subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality (in the case of officers, directors or Key
Employees, such as would affect the Company). There is no action, suit, proceeding or
investigation by the Company pending or which the Company intends to initiate. The foregoing
includes, without limitation, actions, suits, proceedings or investigations pending or threatened in
writing (or any basis therefor known to the Company) involving the prior employment of any of
the Company’s employees, their services provided in connection with the Company’s business,
any information or techniques allegedly proprietary to any of their former employers or their
obligations under any agreements with prior employers.
Intellectual [The Company owns or possesses or [believes it]
can acquire on commercially reasonable terms sufficient legal rights to all Company Intellectual
Property without any known conflict with, or infringement of, the rights of others.] To the
21 The litigation representation will often be unqualified in Series A financings. The bracketed
materiality qualifiers are more common in later rounds of financings. In subsequent rounds it is no longer
appropriate to have the Company make representations regarding directors (as opposed to employees), since
directors will include investor representatives.
22 It may be appropriate to include a knowledge qualifier as to investigations since it would be
difficult for the Company to know of an investigation unless it had been notified. Some investors nevertheless feel
the risk is appropriately borne by the Company.
23 Subsection gives the Purchasers assurances that the Company has the intellectual property
rights necessary to conduct its business, or has disclosed its need to acquire further rights. Although Purchasers
prefer an unqualified representation, this provision is often heavily negotiated, and may be impossible for the
Company to make with certainty for a product in a very early stage of development. Under a common compromise,
the Company provides an unqualified representation with respect to everything but patents, on the theory that
potential patent conflicts cannot always be uncovered even after reasonable investigation, and that patent conflicts
therefore represent an unknown risk that is fairly borne by both parties.
Company’s knowledge, no product or service marketed or sold (or proposed to be marketed or
sold) by the Company violates or will violate any license or infringes or will infringe any
intellectual property rights of any other party. Other than with respect to commercially available
software products under standard end-user object code license agreements, there are no
outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of
any kind relating to the Company Intellectual Property, nor is the Company bound by or a party
to any options, licenses or agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and
processes of any other Person. The Company has not received any communications alleging that
the Company has violated, or by conducting its business, would violate any of the patents,
trademarks, service marks, tradenames, copyrights, trade secrets, mask works or other
proprietary rights or processes of any other Person. The Company has obtained and possesses
valid licenses to use all of the software programs present on the computers and other software-
enabled electronic devices that it owns or leases or that it has otherwise provided to its
employees for their use in connection with the Company’s business. To the Company’s
knowledge, it will not be necessary to use any inventions of any of its employees or consultants
(or Persons it currently intends to hire) made prior to their employment by the Company. Each
employee and consultant has assigned to the Company all intellectual property rights he or she
owns that are related to the Company’s business as now conducted and as presently proposed to
be conducted. Subsection of the Disclosure Schedule lists all Company Intellectual
The Company has not embedded any open source, copyleft or community source
code in any of its products generally available or in development, including but not limited to
any libraries or code licensed under any General Public License, Lesser General Public License
or similar license For purposes of this Subsection , the Company shall be
24 If you represent the Company, you may seek to use a more specific list of items (a subset of the
broader definition of Company Intellectual Property) to be set forth on the Disclosure Schedule: “patents, patent
applications, trademarks, trademark applications, service marks, service mark applications, tradenames, copyrights,
and licenses to and under any of the foregoing.”
25 This representation regarding non-use of open source software is intended to elicit disclosure of
publicly available, third-party source code that the Company has incorporated, or intends to incorporate, into its
products. In most cases, the Purchasers should be concerned primarily about use of third-party source code
distributed under a license that requires the Company to disclose and distribute its own source code, that grants
licensees rights under the Company’s patents, or that contains other provisions that relinquish or may compromise
the Company’s intellectual property rights or commercial prospects. Much publicly available source code is
distributed under licenses that permit it to be freely used and redistributed without imposing onerous obligations
upon those that use it to develop their own software. Note also that the General Public License (“GPL”) and other
so-called “viral” open source licenses impose potentially onerous obligations upon licensees only if code distributed
under them is incorporated into a product that is actually released to the general public. Some proprietary software
companies experiment with code distributed under the GPL during the development process with no intention of
retaining GPL code in the products ultimately released to their customers. (This experimentation typically is done in
a separate “branch” of the source code of a product in development.) The Company may wish to consider
narrowing this representation to include use of third-party source code distributed under any license that imposes
specified obligations upon the Company, and perhaps then only if the third party source code has been included in a
product that the Company has released. An example of a reduced-disclosure open source representation is as
follows: “The Company has not embedded, used or distributed any open source, copyleft or community source code
(including but not limited to any libraries or code, software, technologies or other materials that are licensed or
distributed under any General Public License, Lesser General Public License or similar license arrangement or other
distribution model described by the Open Source Initiative at , collectively “Open Source
Software”) in connection with any of its products or services that are generally available or in development in any
manner that would materially restrict the ability of the Company to protect its proprietary interests in any such
deemed to have knowledge of a patent right if the Company has actual knowledge of the patent
right or would be found to be on notice of such patent right as determined by reference to United
States patent laws.
Compliance with Other Instruments. The Company is not in violation or
default (i) of any provisions of its Restated Certificate or Bylaws, (ii) of any instrument,
judgment, order, writ or decree, (iii) under any note, indenture or mortgage, or (iv) under any
lease, agreement, contract or purchase order to which it is a party or by which it is bound that is
required to be listed on the Disclosure Schedule, or (v) [to its knowledge,] of any provision of
federal or state statute, rule or regulation applicable to the Company, the violation of which
would have a Material Adverse Effect. The execution, delivery and performance of the
Transaction Agreements and the consummation of the transactions contemplated by the
Transaction Agreements will not result in any such violation or be in conflict with or constitute,
with or without the passage of time and giving of notice, either (i) a default under any such
provision, instrument, judgment, order, writ, decree, contract or agreement; or (ii) an event
which results in the creation of any lien, charge or encumbrance upon any assets of the Company
or the suspension, revocation, forfeiture, or nonrenewal of any material permit or license
applicable to the Company.
Agreements;
(a) Except for the Transaction Agreements, there are no agreements,
understandings, instruments, contracts or proposed transactions to which the Company is a party
or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to,
the Company in excess of [_________], (ii) the license of any patent, copyright, trademark, trade
secret or other proprietary right to or from the Company, (iii) the grant of rights to manufacture,
produce, assemble, license, market, or sell its products to any other Person that limit the
Company’s exclusive right to develop, manufacture, assemble, distribute, market or sell its
products, or (iv) indemnification by the Company with respect to infringements of proprietary
rights.
(b) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series of its capital
stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities
individually in excess of [___________] or in excess of [__________] in the aggregate,
(iii) made any loans or advances to any Person, other than ordinary advances for travel expenses,
or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of
product or service or in any manner that requires, or purports to require (i) any Company IP (other than the Open
Source Software itself) be disclosed or distributed in source code form or be licensed for the purpose of making
derivative works; (ii) any restriction on the consideration to be charged for the distribution of any Company IP;
(iii) the creation of any obligation for the Company with respect to Company IP owned by the Company, or the
grant to any third party of any rights or immunities under Company IP owned by the Company; or (iv) any other
limitation, restriction or condition on the right of the Company with respect to its use or distribution of any
Company IP.”
26 Subsections (a) and (a) require the Company to disclose material contracts as well as
other agreements or arrangements that might be important from a due diligence standpoint regardless of dollar
amount (such as intellectual property licenses or a proposed acquisition of the Company). The disclosure thresholds
are negotiable.
its inventory in the ordinary course of business. For the purposes of (b) and (c) of this
Subsection , all indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same Person (including Persons the Company has reason
to believe are affiliated with each other) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsection.
(c) The Company is not a guarantor or indemnitor of any indebtedness
of any other Person.
(d) [The Company has not engaged in the past [three (3) months] in
any discussion with any representative of any Person regarding (i) a sale or exclusive license of
all or substantially all of the Company’s assets, or (ii) any merger, consolidation or other
business combination transaction of the Company with or into another Person.]27
Certain
(a) Other than (i) standard employee benefits generally made available
to all employees, (ii) standard director and officer indemnification agreements approved by the
Board of Directors, and (iii) the purchase of shares of the Company’s capital stock and the
issuance of options to purchase shares of the Company’s Common Stock, in each instance,
approved in the written minutes of the Board of Directors (previously provided to the Purchasers
or their counsel), there are no agreements, understandings or proposed transactions between the
Company and any of its officers, directors, consultants or Key Employees, or any Affiliate
thereof.
(b) The Company is not indebted, directly or indirectly, to any of its
directors, officers or employees or to their respective spouses or children or to any Affiliate of
any of the foregoing, other than in connection with expenses or advances of expenses incurred in
the ordinary course of business or employee relocation expenses and for other customary
employee benefits made generally available to all employees. None of the Company’s directors,
officers or employees, or any members of their immediate families, or any Affiliate of the
foregoing are, directly or indirectly, indebted to the Company[ or, [to the Company’s
knowledge], have any (i) material commercial, industrial, banking, consulting, legal, accounting,
charitable or familial relationship with any of the Company’s customers, suppliers, service
providers, joint venture partners, licensees and competitors, (ii) direct or indirect ownership
interest in any firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation which competes with the
Company except that directors, officers, employees or stockholders of the Company may own
stock in (but not exceeding two percent (2%) of the outstanding capital stock of) publicly traded
27 This representation is not standard, but is sometimes requested by investors concerned that the
Company might be considering a business combination transaction.
28 This representation requires disclosure of situations which could create a conflict of interest. This
is an item of particular concern in the first round of venture capital financing, since loans among the Company and
its founders and their families (which may not be well documented) are especially common prior to the first infusion
of outside capital.
companies that may compete with the Company; or (iii) financial interest in any [material]
contract with the Company].29
Rights of Registration and Voting Except as provided in the
Investors’ Rights Agreement, the Company is not under any obligation to register under the
Securities Act any of its currently outstanding securities or any securities issuable upon exercise
or conversion of its currently outstanding securities. To the Company’s knowledge, except as
contemplated in the Voting Agreement, no stockholder of the Company has entered into any
agreements with respect to the voting of capital shares of the Company.
Property. The property and assets that the Company owns are free and
clear of all mortgages, deeds of trust, liens, loans and encumbrances, except for statutory liens
for the payment of current taxes that are not yet delinquent and encumbrances and liens that arise
in the ordinary course of business and do not materially impair the Company’s ownership or use
of such property or assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances other than those of the lessors of such property or assets. The
Company does not own any real property.
Financial The Company has delivered to each Purchaser its
[unaudited] [audited] financial statements as of [_______ __, 20_] and for the fiscal year ended
[_______ __, 20_] [and its unaudited financial statements (including balance sheet, income
statement and statement of cash flows) as of [_______ __, 20_] and for the [_____]-month
period ended [_______ __, 20_] (collectively, the “Financial Statements”). The Financial
Statements have been prepared in accordance with generally accepted accounting principles
(“GAAP”) applied on a consistent basis throughout the periods indicated[, except that the
unaudited Financial Statements may not contain all footnotes required by GAAP]. The Financial
Statements fairly present in all material respects the financial condition and operating results of
the Company as of the dates, and for the periods, indicated therein, subject in the case of the
unaudited Financial Statements to normal year-end audit adjustments. Except as set forth in the
Financial Statements, the Company has no material liabilities or obligations, contingent or
29 The bracketed portion of this sentence may be a broader representation than the Company is
comfortable giving. In addition, it is appropriate to include directors throughout this section only at the first
financing round. In subsequent rounds the directors will include investor representatives, and it should not be
incumbent on the Company to make disclosures as to them.
30 Prior registration rights may conflict with those currently being negotiated among the investors
and the Company. Therefore, any such rights must be carefully reviewed and any conflicts resolved. It is common to
have any previous registration rights agreement amended to include the new investors, or replaced by a new
agreement including the old and new investors and clarifying their rights relative to each other as well as the
Company. It is preferable to have all registration rights relating to the Company’s securities set forth in one
document. Having several different sets of rights outstanding can be a significant (and confusing) complication
when the Company goes public.
31 For early stage companies without financial statements, it may be appropriate to have an
alternative provision, such as the following:
Material Liabilities. The Company has no liability or obligation, absolute or contingent (individually or in
the aggregate), except (i) obligations and liabilities incurred after the date of incorporation in the ordinary course of
business that are not material, individually or in the aggregate, and (ii) obligations under contracts made in the
ordinary course of business that would not be required to be reflected in financial statements prepared in accordance
with GAAP.
otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to
[___________]; (ii) obligations under contracts and commitments incurred in the ordinary course
of business; and (iii) liabilities and obligations of a type or nature not required under GAAP to be
reflected in the Financial Statements, which, in all such cases, individually and in the aggregate
would not have a Material Adverse Effect. The Company maintains and will continue to
maintain a standard system of accounting established and administered in accordance with
GAAP.
Since [date of most recent financial statements/date of
incorporation if no financial statements] there has not been:
(a) any change in the assets, liabilities, financial condition or operating
results of the Company from that reflected in the Financial Statements, except changes in the
ordinary course of business that have not caused, in the aggregate, a Material Adverse Effect;
(b) any damage, destruction or loss, whether or not covered by
insurance, that would have a Material Adverse Effect;
(c) any waiver or compromise by the Company of a valuable right or
of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or encumbrance or
payment of any obligation by the Company, except in the ordinary course of business and the
satisfaction or discharge of which would not have a Material Adverse Effect;
(e) any material change to a material contract or agreement by which
the Company or any of its assets is bound or subject;
(f) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(g) any resignation or termination of employment of any officer or
Key Employee of the Company;
(h) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or assets, except liens for
taxes not yet due or payable and liens that arise in the ordinary course of business and do not
materially impair the Company’s ownership or use of such property or assets;
32 The purpose of this representation is to “bring down” the financial statements from the period
covered thereby. Therefore, the blank in Subsection should be filled with the last date covered by the financial
statements provided to the investors, and any of the changes listed in this section must be disclosed on the
Disclosure Schedule. While the itemization in this section serves as a useful due diligence checklist, this section can
be replaced by a much shorter section reading simply, “[To the Company’s knowledge], since [______,] there have
been no events or circumstances of any kind that have had or could reasonably be expected to result in a Material
Adverse Effect.”
(i) any loans or guarantees made by the Company to or for the benefit
of its employees, officers or directors, or any members of their immediate families, other than
travel advances and other advances made in the ordinary course of its business;
(j) any declaration, setting aside or payment or other distribution in
respect of any of the Company’s capital stock, or any direct or indirect redemption, purchase, or
other acquisition of any of such stock by the Company;
(k) any sale, assignment or transfer of any Company Intellectual
Property that could reasonably be expected to result in a Material Adverse Effect;
(l) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of the Company;
(m) to the Company’s knowledge, any other event or condition of any
character, other than events affecting the economy or the Company’s industry generally, that
could reasonably be expected to result in a Material Adverse Effect; or
(n) any arrangement or commitment by the Company to do any of the
things described in this Subsection .
Employee Matters.
(a) As of the date hereof, the Company employs [________] full-time
employees and [________] part-time employees and engages [________] consultants or
independent contractors. [Subsection of] the Disclosure Schedule sets forth a detailed
description of all compensation, including salary, bonus, severance obligations and deferred
compensation paid or payable for each officer, employee, consultant and independent contractor
of the Company who received compensation in excess of $[________] for the fiscal year ended
[____ __, 20_] or is anticipated to receive compensation in excess of $[________] for the fiscal
year ending [____ __, 20_].33
(b) To the Company’s knowledge, none of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or administrative agency,
that would materially interfere with such employee’s ability to promote the interest of the
Company or that would conflict with the Company’s business. Neither the execution or delivery
of the Transaction Agreements, nor the carrying on of the Company’s business by the employees
of the Company, nor the conduct of the Company’s business as now conducted and as presently
proposed to be conducted, will, to the Company’s knowledge, conflict with or result in a breach
of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or
instrument under which any such employee is now obligated.
33 Many practitioners prefer not to list employee compensation in the Disclosure Schedule,
particularly if employees are participating in the round. Even if there is no employee participation, however,
employee compensation is a sensitive matter for many companies, and there is always a risk of the Disclosure
Schedule inadvertently winding up in the wrong hands.
(c) The Company is not delinquent in payments to any of its
employees, consultants, or independent contractors for any wages, salaries, commissions,
bonuses, or other direct compensation for any service performed for it to the date hereof or
amounts required to be reimbursed to such employees, consultants or independent contractors.
The Company has complied in all material respects with all applicable state and federal equal
employment opportunity laws and with other laws related to employment, including those related
to wages, hours, worker classification and collective bargaining. The Company has withheld and
paid to the appropriate governmental entity or is holding for payment not yet due to such
governmental entity all amounts required to be withheld from employees of the Company and is
not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any
of the foregoing.
(d) To the Company’s knowledge, no Key Employee intends to
terminate employment with the Company or is otherwise likely to become unavailable to
continue as a Key Employee, nor does the Company have a present intention to terminate the
employment of any of the foregoing. The employment of each employee of the Company is
terminable at the will of the Company. Except as set forth in Subsection of the Disclosure
Schedule or as required by law, upon termination of the employment of any such employees, no
severance or other payments will become due. Except as set forth in Subsection of the
Disclosure Schedule, the Company has no policy, practice, plan or program of paying severance
pay or any form of severance compensation in connection with the termination of employment
services.
(e) The Company has not made any representations regarding equity
incentives to any officer, employee, director or consultant that are inconsistent with the share
amounts and terms set forth in the minutes of meetings of the Company’s board of directors.
(f) Each former Key Employee whose employment was terminated by
the Company has entered into an agreement with the Company providing for the full release of
any claims against the Company or any related party arising out of such employment.
(g) Subsection of the Disclosure Schedule sets forth each
employee benefit plan maintained, established or sponsored by the Company, or which the
Company participates in or contributes to, which is subject to the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”). The Company has made all required
contributions and has no liability to any such employee benefit plan, other than liability for
health plan continuation coverage described in Part 6 of Title I(B) of ERISA, and has complied
in all material respects with all applicable laws for any such employee benefit plan.
(h) [The Company is not bound by or subject to (and none of its assets
or properties is bound by or subject to) any written or oral, express or implied, contract,
commitment or arrangement with any labor union, and no labor union has requested or, to the
knowledge of the Company, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving the Company
pending, or to the Company’s knowledge, threatened, which could have a Material Adverse
Effect, nor is the Company aware of any labor organization activity involving its employees.]
(i) [To the Company’s knowledge, none of the Key Employees or
directors34 of the Company has been (a) subject to voluntary or involuntary petition under the
federal bankruptcy laws or any state insolvency law or the appointment of a receiver, fiscal agent
or similar officer by a court for his business or property; (b) convicted in a criminal proceeding
or named as a subject of a pending criminal proceeding (excluding traffic violations and other
minor offenses); (c) subject to any order, judgment or decree (not subsequently reversed,
suspended, or vacated) of any court of competent jurisdiction permanently or temporarily
enjoining him from engaging, or otherwise imposing limits or conditions on his engagement in
any securities, investment advisory, banking, insurance, or other type of business or acting as an
officer or director of a public company; or (d) found by a court of competent jurisdiction in a
civil action or by the Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated any federal or state securities, commodities, or unfair trade
practices law, which such judgment or finding has not been subsequently reversed, suspended, or
vacated.]
Tax Returns and Payments. There are no federal, state, county, local or
foreign taxes due and payable by the Company which have not been timely paid. There are no
accrued and unpaid federal, state, country, local or foreign taxes of the Company which are due,
whether or not assessed or disputed. There have been no examinations or audits of any tax
returns or reports by any applicable federal, state, local or foreign governmental agency. The
Company has duly and timely filed all federal, state, county, local and foreign tax returns
required to have been filed by it and there are in effect no waivers of applicable statutes of
limitations with respect to taxes for any year.
The Company has in full force and effect fire and casualty
insurance policies with extended coverage, sufficient in amount (subject to reasonable
deductions) to allow it to replace any of its properties that might be damaged or destroyed.
Employee Agreements. Each current and former employee, consultant
and officer of the Company has executed an agreement with the Company regarding
confidentiality and proprietary information substantially in the form or forms delivered to the
counsel for the Purchasers (the “Confidential Information Agreements”). No current or
former Key Employee has excluded works or inventions from his or her assignment of
inventions pursuant to such Key Employee’s Confidential Information Agreement. Each current
and former Key Employee has executed a [non-competition and] non-solicitation agreement
substantially in the form or forms delivered to counsel for the Purchasers. The Company is not
aware that any of its Key Employees is in violation of any agreement covered by this Subsection
.
Permits. The Company has all franchises, permits, licenses and any
similar authority necessary for the conduct of its business, the lack of which could reasonably be
34 See footnote 29 – same point as to investor directors.
35 The investors may negotiate life insurance coverage in favor of the Company for certain founders
or other key employees. If such coverage is in effect prior to the closing, it may be appropriate to add to this
representation a statement of the covered individuals and amount of coverage for each.
expected to have a Material Adverse Effect. The Company is not in default in any material
respect under any of such franchises, permits, licenses or other similar authority.
Corporate Documents. The Restated Certificate and Bylaws of the
Company are in the form provided to the Purchasers. The copy of the minute books of the
Company provided to the Purchasers contains minutes of all meetings of directors and
stockholders and all actions by written consent without a meeting by the directors and
stockholders since the date of incorporation and accurately reflects in all material respects all
actions by the directors (and any committee of directors) and stockholders with respect to all
transactions referred to in such minutes.
[83(b) Elections. To the Company’s knowledge, all elections and notices
under Section 83(b) of the Code have been or will be timely filed by all individuals who have
acquired unvested shares of the Company’s Common Stock.]36
[Real Property Holding The Company is not now and has
never been a “United States real property holding corporation” as defined in the Code and any
applicable regulations promulgated thereunder. The Company has filed with the Internal
Revenue Service all statements, if any, with its United States income tax returns which are
required under such regulations.]
Environmental and Safety Laws. Except as could not reasonably be
expected to have a Material Adverse Effect [to the best of its knowledge] (a) the Company is and
has been in compliance with all Environmental Laws; (b) there has been no release or [to the
Company’s knowledge] threatened release of any pollutant, contaminant or toxic or hazardous
material, substance or waste or petroleum or any fraction thereof (each a “Hazardous
Substance”), on, upon, into or from any site currently or heretofore owned, leased or otherwise
used by the Company; (c) there have been no Hazardous Substances generated by the Company
that have been disposed of or come to rest at any site that has been included in any published
. federal, state or local “superfund” site list or any other similar list of hazardous or toxic
waste sites published by any governmental authority in the United States; and (d) there are no
underground storage tanks located on, no polychlorinated biphenyls (“PCBs”) or PCB-
containing equipment used or stored on, and no hazardous waste as defined by the Resource
Conservation and Recovery Act, as amended, stored on, any site owned or operated by the
Company, except for the storage of hazardous waste in compliance with Environmental Laws.
The Company has made available to the Purchasers true and complete copies of all material
36 This representation is fairly standard in West Coast venture financing transactions; it is much less
common in financings originating on the East Coast.
37 This representation is appropriate if there are foreign investors (., nonresident aliens) involved
in the financing, since they are subject to the Foreign Investment Real Property Tax Act of 1980 (“FIRPTA”).
Under FIRPTA, a transfer of an interest in a . Real Property Holding Corporation (a “USRPHC”) by a foreign
investor is subject to tax withholding, notwithstanding the general rule that sales of stock by foreigners are not
subject to . taxation. A corporation is USRPHC if more than fifty percent (50%) of its assets consist of . real
property. While very few, if any, venture capital investors are USRPHCs, it is customary to provide this
representation in order to ensure that any foreign investors will not be subject to tax withholding. Regardless of
FIRPTA, if a foreign person or entity is, directly or indirectly, acquiring a ten percent (10%) or greater voting
interest in the Company, it must file Form BE-13 with the . Department of Commerce unless an exemption
applies.
environmental records, reports, notifications, certificates of need, permits, pending permit
applications, correspondence, engineering studies and environmental studies or assessments.
For purposes of this Subection , “Environmental Laws” means any law,
regulation, or other applicable requirement relating to (a) releases or threatened release of
Hazardous Substance; (b) pollution or protection of employee health or safety, public health or
the environment; or (c) the manufacture, handling, transport, use, treatment, storage, or disposal
of Hazardous Substances.
[Qualified Small Business As of and immediately following the
Closing: (i) the Company will be an eligible corporation as defined in Section 1202(e)(4) of the
Code, (ii) the Company will not have made purchases of its own stock described in Code Section
1202(c)(3)(B) during the one (1) year period preceding the Initial Closing, except for purchases
that are disregarded for such purposes under Treasury Regulation Section -2, and (iii) the
Company’s aggregate gross assets, as defined by Code Section 1202(d)(2), at no time between its
incorporation and through the Initial Closing have exceeded $50 million, taking into account the
assets of any corporations required to be aggregated with the Company in accordance with Code
Section 1202(d)(3); provided, however, that in no event shall the Company be liable to the
Purchasers or any other party for any damages arising from any subsequently proven or
identified error in the Company’s determination with respect to the applicability or interpretation
of Code Section 1202, unless such determination shall have been given by the Company in a
manner either grossly negligent or fraudulent.]
The Company has made available to the Purchasers all the
information reasonably available to the Company that the Purchasers have requested for deciding
whether to acquire the Shares, including certain of the Company’s projections describing its
proposed business plan (the “Business Plan”). No representation or warranty of the Company
contained in this Agreement, as qualified by the Disclosure Schedule, and no certificate
furnished or to be furnished to Purchasers at the Closing contains any untrue statement of a
material fact or[, to the Company’s knowledge,] omits to state a material fact necessary in order
to make the statements contained herein or therein not misleading in light of the circumstances
38 Section 1202 of the Internal Revenue Code provides for a fifty percent (50%) exclusion (subject to
certain limitations) from taxable income of gains recognized on the disposition of certain stock in qualifying
corporations that has been held for at least five years. Although investors may ask for such a representation,
companies may resist on the theory that the analysis regarding current compliance is complex, and that many
elements of the test are outside the Company’s control. In any event, compliance with numerous other requirements
during the time the investor holds the stock is needed for the investor to qualify for the benefits of Section 1202.
39 There is no consensus position on what should be included in the “Disclosure” representation.
Purchasers will generally try to obtain an unqualified representation that none of the written information and
business plan information provided to them by the Company contains a material misstatement or a materially
misleading omission. The Company will generally try to resist such a broad representation, on the basis that a 10b-5
type representation, commonly found in an IPO prospectus, is inappropriate for a private financing in which a
prospectus-type due diligence process has not occurred. The language shown represents a compromise position. It
is important to note that the investors’ right of recovery for a breach of this rep may be broader than under Rule SEC
10b-5, because in order to prevail in a Rule 10b-5 securities fraud action, the purchaser must establish that the seller
acted with scienter. That is, a purely innocent misrepresentation normally does not give rise to civil liability under
10b-5. Another issue for a Series A investor to consider is the relative utility of this rep to the Series A investor at
this stage, versus the risk of giving such a broad rep to investors in later rounds (who, in a worst case, may be
looking for a rep on which to “hang their hat” if they decide they want out of the investment).
under which they were made. The Business Plan was prepared in good faith; however, the
Company does not warrant that it will achieve any results projected in the Business Plan. It is
understood that this representation is qualified by the fact that the Company has not delivered to
the Purchasers, and has not been requested to deliver, a private placement or similar
memorandum or any written disclosure of the types of information customarily furnished to
purchasers of securities.
[Small Business The Company together with its “affiliates”
(as that term is defined in Section of Title 13 of the Code of Federal Regulations
(“CFR”), is a [“small business concern”][“smaller business”] within the meaning of the Small
Business Investment Act of 1958, as amended (the “Small Business Act”), and the regulations
promulgated thereunder, including [Section of Title 13 of the CFR][Section of
Title 13 of the CFR]. The information delivered to each Purchaser that is a licensed Small
Business Investment Company (an “SBIC Purchaser”) on SBA Forms 480, 652 and 1031
delivered in connection herewith is true and complete. The Company is not ineligible for
financing by any SBIC Purchaser pursuant to Section of the CFR. The Company
acknowledges that each SBIC Purchaser is a Federal licensee under the Small Business Act.]
[Foreign Corrupt Practices Act. Neither the Company nor any of the
Company’s directors, officers, employees or agents have, directly or indirectly, made, offered,
promised or authorized any payment or gift of any money or anything of value to or for the
benefit of any “foreign official” (as such term is defined in the . Foreign Corrupt Practices
Act of 1977, as amended (the “FCPA”)), foreign political party or official thereof or candidate
for foreign political office for the purpose of (i) influencing any official act or decision of such
official, party or candidate, (ii) inducing such official, party or candidate to use his, her or its
influence to affect any act or decision of a foreign governmental authority, or (iii) securing any
improper advantage, in the case of (i), (ii) and (iii) above in order to assist the Company or any
of its affiliates in obtaining or retaining business for or with, or directing business to, any person.
Neither the Company nor any of its directors, officers, employees or agents have made or
authorized any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of
funds or received or retained any funds in violation of any law, rule or regulation. The Company
further represents that it has maintained, and has caused each of its subsidiaries and affiliates to
maintain, systems of internal controls (including, but not limited to, accounting systems,
purchasing systems and billing systems) to ensure compliance with the FCPA or any other
applicable anti-bribery or anti-corruption law. Neither the Company, or, to the Company’s
knowledge, any of its officers, directors or employees are the subject of any allegation, voluntary
disclosure, investigation, prosecution or other enforcement action related to the FCPA or any
other anti-corruption law (collectively, “Enforcement Action”).]
[Data Privacy. In connection with its collection, storage, transfer
(including, without limitation, any transfer across national borders) and/or use of any personally
identifiable information from any individuals, including, without limitation, any customers,
prospective customers, employees and/or other third parties (collectively “Personal
Information”), the Company is and has been[, to the Company’s knowledge,] in compliance
with all applicable laws in all relevant jurisdictions, the Company’s privacy policies and the
40 The Small Business Concern representation is only necessary if one or more Purchasers is a SBIC.
requirements of any contract or codes of conduct to which the Company is a party. The
Company has commercially reasonable physical, technical, organizational and administrative
security measures and policies in place to protect all Personal Information collected by it or on
its behalf from and against unauthorized access, use and/or disclosure. The Company is and has
been[, to the Company’s knowledge,] in compliance in all material respects with all laws relating
to data loss, theft and breach of security notification obligations.]
[See ADDENDUM at end of this document with sample Founders Representations and
Warranties.]41
3. Representations and Warranties of the Each Purchaser hereby
represents and warrants to the Company, severally and not jointly, that:
Authorization. The Purchaser has full power and authority to enter into
the Transaction Agreements. The Transaction Agreements to which the Purchaser is a party,
when executed and delivered by the Purchaser, will constitute valid and legally binding
obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and any
other laws of general application affecting enforcement of creditors’ rights generally, and as
limited by laws relating to the availability of specific performance, injunctive relief or other
equitable remedies, or (b) to the extent the indemnification provisions contained in the Investors’
Rights Agreement may be limited by applicable federal or state securities laws.
Purchase Entirely for Own This Agreement is made with the
Purchaser in reliance upon the Purchaser’s representation to the Company, which by the
Purchaser’s execution of this Agreement, the Purchaser hereby confirms, that the Shares to be
acquired by the Purchaser will be acquired for investment for the Purchaser’s own account, not
as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and
that the Purchaser has no present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, the Purchaser further represents that the
Purchaser does not presently have any contract, undertaking, agreement or arrangement with any
Person to sell, transfer or grant participations to such Person or to any third Person, with respect
41 Founders’ representations are controversial and may elicit significant resistance as they are found
in a minority of venture deals. They are more likely to appear if Founders are receiving liquidity from the
transaction, or if there is heightened concern over intellectual property (., the Company is a spin-out from an
academic institution or the Founder was formerly with another company whose business could be deemed
competitive with the Company), or in international deals. Founders’ representations are even less common in
subsequent rounds, where risk is viewed as significantly diminished and fairly shared by the investors, rather than
being disproportionately borne by the Founders. A sample set of Founders Representations is attached as an
Addendum at the end of this Model Stock Purchase Agreement.
42 The main purpose of the Purchasers’ representations and warranties in Section 4 are to ensure that
the investors meet the criteria for private placement exceptions under applicable state and federal securities laws.
43 Occasionally, a venture capital fund will allow its employees and principals to co-invest through a
special entity as a nominee. Assuming these employees and principals meet the accreditation or sophistication
standards necessary for the private placement exemption being relied on, and assuming the special purpose entity is
not formed solely for the purpose of this investment, the language of this provision can be tailored to carve out that
special entity.
to any of the Shares. The Purchaser has not been formed for the specific purpose of acquiring
the Shares.
Disclosure of Information. The Purchaser has had an opportunity to
discuss the Company’s business, management, financial affairs and the terms and conditions of
the offering of the Shares with the Company’s management and has had an opportunity to review
the Company’s facilities. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the Purchasers to
rely thereon.
Restricted Securities. The Purchaser understands that the Shares have not
been, and will not be, registered under the Securities Act, by reason of a specific exemption from
the registration provisions of the Securities Act which depends upon, among other things, the
bona fide nature of the investment intent and the accuracy of the Purchaser’s representations as
expressed herein. The Purchaser understands that the Shares are “restricted securities” under
applicable . federal and state securities laws and that, pursuant to these laws, the Purchaser
must hold the Shares indefinitely unless they are registered with the Securities and Exchange
Commission and qualified by state authorities, or an exemption from such registration and
qualification requirements is available. The Purchaser acknowledges that the Company has no
obligation to register or qualify the Shares, or the Common Stock into which it may be
converted, for resale except as set forth in the Investors’ Rights Agreement. The Purchaser
further acknowledges that if an exemption from registration or qualification is available, it may
be conditioned on various requirements including, but not limited to, the time and manner of
sale, the holding period for the Shares, and on requirements relating to the Company which are
outside of the Purchaser’s control, and which the Company is under no obligation and may not
be able to satisfy. [The Purchaser acknowledges that the Company filed a registration statement
for a public offering of its Common Stock, which was withdrawn effective [_____ __, 20_]. The
Purchaser understands that this offering is not intended to be part of the public offering, and that
the Purchaser will not be able to rely on the protection of Section 11 of the Securities ]
No Public Market. The Purchaser understands that no public market now
exists for the Shares, and that the Company has made no assurances that a public market will
ever exist for the Shares.
Legends. The Purchaser understands that the Shares and any securities
issued in respect of or exchange for the Shares, may bear one or all of the following legends:
(a) “THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH TRANSFER
MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO
44 Include the bracketed language if the private placement exemption is based on the safe harbor in
Rule 155(c) under the Securities Act for private offerings following an abandoned public offering.
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933.”
(b) Any legend set forth in, or required by, the other Transaction
Agreements.
(c) Any legend required by the securities laws of any state to the
extent such laws are applicable to the Shares represented by the certificate so legended.
Accredited Investor. The Purchaser is an accredited investor as defined in
Rule 501(a) of Regulation D promulgated under the Securities Act.
Foreign Investors. If the Purchaser is not a United States person (as
defined by Section 7701(a)(30) of the Code), the Purchaser hereby represents that it has satisfied
itself as to the full observance of the laws of its jurisdiction in connection with any invitation to
subscribe for the Shares or any use of this Agreement, including (i) the legal requirements within
its jurisdiction for the purchase of the Shares, (ii) any foreign exchange restrictions applicable to
such purchase, (iii) any governmental or other consents that may need to be obtained, and
(iv) the income tax and other tax consequences, if any, that may be relevant to the purchase,
holding, redemption, sale, or transfer of the Shares. The Purchaser’s subscription and payment
for and continued beneficial ownership of the Shares will not violate any applicable securities or
other laws of the Purchaser’s jurisdiction.
No General Solicitation. Neither the Purchaser, nor any of its officers,
directors, employees, agents, stockholders or partners has either directly or indirectly, including,
through a broker or finder (a) engaged in any general solicitation, or (b) published any
advertisement in connection with the offer and sale of the
Exculpation Among Purchasers. The Purchaser acknowledges that it is
not relying upon any Person, other than the Company and its officers and directors, in making its
investment or decision to invest in the Company. [The Purchaser agrees that neither any
Purchaser nor the respective controlling Persons, officers, directors, partners, agents, or
employees of any Purchaser shall be liable to any other Purchaser for any action heretofore taken
or omitted to be taken by any of them in connection with the purchase of the Shares.]46
Residence. If the Purchaser is an individual, then the Purchaser resides in
the state or province identified in the address of the Purchaser set forth on Exhibit A; if the
Purchaser is a partnership, corporation, limited liability company or other entity, then the office
or offices of the Purchaser in which its principal place of business is identified in the address or
addresses of the Purchaser set forth on Exhibit A.
45 In September 2012 and pursuant to the Jumpstart Our Business Startups Act (the “JOBS Act”),
the SEC proposed new rules amending Rule 506 of Regulation D and Rule 144A which would provide that the Rule
502(c) prohibition against general solicitation and general advertising would not apply to offers and sales of
securities made pursuant to Rule 506 where all purchasers of the securities are accredited investors. Until these
rules are finalized, any disclosures made under Section in reliance on the JOBS Act should be carefully
scrutinized by counsel.
46 This provision is intended to protect the lead investor from claims of reliance by other investors.
[Consent to Promissory Note Conversion and Termination. Each
Purchaser, to the extent that such Purchaser, as set forth on the Schedule of Purchasers, is a
holder of any promissory note of the Company being converted and/or cancelled in consideration
of the issuance hereunder of Shares to such Purchaser, hereby agrees that the entire amount owed
to such Purchaser under such note is being tendered to the Company in exchange for the
applicable Shares set forth on the Schedule of Purchasers, and effective upon the Company’s and
such Purchaser’s execution and delivery of this Agreement, without any further action required
by the Company or such Purchaser, such note and all obligations set forth therein shall be
immediately deemed repaid in full and terminated in their entirety, including, but not limited to,
any security interest effected ]
4. Conditions to the Purchasers’ Obligations at The obligations of each
Purchaser to purchase Shares at the Initial Closing [or any subsequent Closing] are subject to the
fulfillment, on or before such
