The stock purchase agreement (SPA) is the central transaction document in a venture capital financing. It sets forth the sale (by the company) and purchase (by one ore more investors) of preferred stock of the company. Under the SPA, the company issues preferred shares in exchange for cash, cancellation of debt, conversion of certain securities, or a combination thereof. The SPA specifies key deal terms such as the number of shares to be issued, the price of such shares, and the dates of the closing (or closings).
Beyond the purchase mechanics, the SPA references the contemporaneous execution and delivery of other NVCA model documents, such as the investor rights agreement, voting agreement, and right of first refusal and co-sale agreement, as well as the filing of an amended and restated certificate of incorporation of the company—creating a comprehensive framework for the investment.
Watch our NVCA document series on the stock purchase agreement
Role of the term sheet
The term sheet serves as the roadmap for drafting the SPA and related documents. While non-binding, it outlines the economic and legal terms of the transaction, including investment amount, price per share, class of securities, and timing for closings. It often includes a capitalization table showing post-financing ownership and may highlight specific conditions to closing, such as required regulatory approvals. Although only confidentiality and exclusivity provisions are binding, the term sheet sets expectations for the final transaction and is not, by itself, an enforceable document.
Capitalization table
Accurate cap table management is critical. This table sets forth the share ownership of the company by class of security—common stock, preferred stock, options, warrants, and convertible instruments like SAFEs or convertible notes, on both an outstanding and a fully-diluted basis. Investors focus on ownership on a fully diluted-basis, which assumes all options and convertible instruments are exercised into shares. Preparing both a pre-money and post-money pro forma cap table ensures clarity on ownership after the financing closes.
Representations and warranties
The SPA includes representations and warranties from both the company and investors. For the company, representations and warranties are generally included to confirm legal existence, authority to issue shares, valid issuance, and compliance with laws. The representations and warranties also cover areas such as litigation, intellectual property, employment matters, and capitalization. Disclosure schedules allow the company to note exceptions to the representations and warranties and provide investors further diligence points to consider.
The NVCA model SPA includes optional or bracketed reps addressing industry-specific or situational concerns, such as healthcare compliance, export controls, data privacy, and foreign ownership. Increasingly, provisions like Qualified Small Business Stock (QSBS) and data privacy require careful review due to their complexity and regulatory implications.
Investor representations focus on confirming authority to invest, accredited investor status, and acknowledgment of securities law restrictions. They also include assurances about foreign person status and an exculpation clause, which clarifies that each investor relies on its own diligence rather than other syndicate members. Conversion of any outstanding SAFEs or convertible notes is documented within the SPA to ensure all instruments are properly addressed.
Conditions to closing
Closing conditions typically include delivery of all NVCA model documents, the filing of the amended charter, officer certificates, compliance certificates, disclosure schedules, and an opinion of counsel. Additional deliverables, such as founder agreements or management rights letters, should be identified early to avoid delays. Venture financings generally involve simultaneous signing and closing, so all documents and schedules must be finalized and dated as of the closing date, with funds being delivered upon the mutual exchange of executed agreements.
Miscellaneous provisions
The SPA concludes with provisions on governing law (commonly Delaware), amendment mechanics, fee reimbursements, and dispute resolution. Attention to these details ensures alignment across all transaction documents.
FAQs: Understanding the SPA
What is the purpose of the SPA in a venture capital financing?
The SPA is the primary transaction document that governs the sale and purchase of preferred stock between a company and its investors. It sets out the number and price of shares, closing mechanics, representations and warranties, and integrates other key agreements like the investor rights agreement and voting agreement to form a complete investment framework.
Why is the capitalization table important in the stock purchase agreement process?
The capitalization table shows the company’s ownership structure before and after the financing, including common stock, preferred stock, options, and convertible instruments. Investors rely on this to confirm their percentage ownership on a fully diluted basis. Accurate cap table management is essential for calculating valuation, purchase price, and ensuring transparency in ownership.
What are disclosure schedules in the stock purchase agreement process, and why do they matter?
Disclosure schedules accompany the company’s representations and warranties in the SPA. They provide an opportunity for the company to disclose exceptions to the representations and warranties or provide details that make those statements accurate. For investors, these schedules serve as a key diligence tool, helping identify risks and verify information in a fast-moving venture deal where extensive diligence may not occur.