Once you have negotiated and signed back the term sheet, the process of ensuring that you have all the proper legal documents will begin. Several key documents must be drafted, negotiated and finalized before the investor will cut a cheque for your business.
If you have negotiated a comprehensive term sheet with the investor, most of the key points should already be agreed to before drafting the documents. Engage experienced and knowledgeable legal counsel once you begin negotiating the term sheet to make sure that the process runs as smoothly as possible.
“Series A” equity financing includes a subscription agreement, a shareholder agreement and articles of amendment that establish one or more new classes of shares to be issued to the investors. Other ancillary documentation may include registration rights, founder stock restriction agreements, new employment agreements for key employees, a stock option plan and a management rights agreement. For financing led by a U.S. investor, provisions usually included in a shareholder agreement may be included in two separate agreements—a stockholder agreement and a voting agreement.
The IP transfer agreement may be included if there is intellectual property (IP) either being licensed or assigned from another party. For an early-stage company, this is often the only tangible asset. Have an IP lawyer review the documentation to make that the license the assignment has been properly executed. Proper ownership of IP can make or break future financing transactions, M&A or IPOs.
A shareholder’s agreement defines an agreement among the shareholders of the company. It regulates the following matters:
A subscription agreement provides the details of the purchase price for the security. It also includes the representation and warranties that each party will make to each other as part of the agreement. These“reps and warranties” are statements that one party gives certain assurances to the other, and on which the other party can rely.
A representation is a statement of a fact; a warranty is more of an assurance. Make sure that you understand the legal ramifications of the representations and warranties. As part of the subscription agreement, you will prepare disclosure schedules (or schedule of exceptions). This is a very important document, as you will be listing or disclosing all of the relevant information required as part of the legal agreement.
Houston, T., Johnson, A., & Smith, E. (2006, September 15). Technology Startups: A Practical Legal Guide for Founders, Executives and Investors. Retrieved April 9, 2009, from Fraser Milner Casgrain website at , now available at http://www.lexology.com/library/detail.aspx?g=7c476ef3-67a9-4a33-8053-05331cb29e6a