Raising venture capital / private equity requires more than just pitching your idea and business plan to a group of people with money to invest – although your pitch is obviously a crucial component. There are lots of documents that will be required, and those documents will usually require the careful scrutiny of a venture capital attorney. Below is a short, but not inclusive, list of what you might expect:
- Venture Capital Term Sheet – These are typically non-binding outlines of the terms of a venture capital deal. Don’t let the “non-binding” portion fool you, though. Terms laid out in a term sheet serve as the basis for all future negotiations, and any attempt to deviate from those terms will not be met kindly during deal negotiations.
- Stock Purchase Agreement – This is the definitive agreement setting forth the terms of the venture capital investment, such as the purchase price, the closing date, and the conditions surrounding the issuance of stock – which more likely than not will be preferred stock. There will also be numerous representation and warranty provisions, among other provisions, that will need to be carefully crafted by a venture capital attorney.
- An Amendment to the Bylaws – Assuming the company is a corporation and that the VC is conditioning its investment on the receipt of preferred stock (which it likely will), the bylaws of the corporation will need to be amended. This amendment will create a new class of preferred stock and will include anti-dilution provisions. dividend rights, liquidation rights and conversion rights. Some states require a “Certificate of Designation” to accomplish this, rather than an amendment to the bylaws.
- Right of First Refusal / Voting Agreement – This agreement will grant the VC a right of first refusal to purchase any shares in the company that come available for sale. It will also likely contain a number of restrictions on the transfer of common stock, as well as tag-along rights allowing the VC to participate in the sale of any common shares. Finally, there will likely be a voting agreement requiring that the common shareholders elect the VC’s nominee(s) to the company’s board of directors.
- Consulting Agreement – Often times a VC will require payment of a monthly fee by the company in return for certain management services provided by the VC.
These are just a few of the documents that a company might normally expect to see during the process of raising capital. As always, you should consult an attorney with knowledge of the venture capital process.
What do you think? Anything else to add to the checklist