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. 1.1
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.”
1.2
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.
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.
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(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 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.
1.3
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”). 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, e.g., 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.
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The date of the purchase and sale of the Milestone Shares are referred to in this Agreement as the “Milestone Closing.”7]
1.4 [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.]
1.5 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. 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 (i.e., 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.
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(e) “Investors’ Rights Agreement” means the agreement among the
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Company and the Purchasers [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. (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 Property.10
(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 1.3. 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 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, e.g., important salespeople or consultants and define Key Employees by function (e.g., 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.
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(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 1.3. (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 subsections.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.
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