Certificate of Incorporation in Venture Financing: Ultimate Review Guide

Venture financing deals usually involve the signing of the following documents:

  1. Term Sheet: The term sheet is a non-binding document outlining the basic terms and conditions under which an investment will be made.
  2. Share Purchase Agreement (SPA): The SPA is a central document in any VC deal. It sets out the specific terms of the transaction, including the number of shares being sold, the price per share, and the total investment amount. This agreement also covers representations and warranties, conditions to closing, and indemnification provisions
  3. Disclosure Schedule for SPA: This schedule accompanies the SPA and provides specific disclosures related to the representations and warranties in the SPA. It often includes exceptions or additional details that qualify or explain these representations and warranties, which are vital for assessing risks and obligations.
  4. Voting Agreement: The voting agreement details how certain shareholders must vote their shares, particularly in the context of board composition, sale of the company, and other major corporate decisions. It's essential for maintaining investor rights and balancing interests among different shareholder classes.
  5. Investor Rights Agreement (IRA): This document outlines various rights and privileges granted to investors, including rights to information, registration rights, and other governance-related matters.
  6. Right of First Refusal / Co-sale Agreement: This agreement provides the company, and sometimes other shareholders, the right to buy shares before the selling shareholder can transfer them to a third party (Right of First Refusal). It may also allow shareholders to join in on a sale (Co-sale).
  7. Certificate of Incorporation: Outlining the rights and privileges associated with preferred stock, which is commonly issued to venture investors.

In this guide, we will focus on the Certificate of Incorporation. Our goal is to provide comprehensive guidance for effectively reviewing, negotiating, and advising on the Certificate of Incorporation in a VC deal.

Guides in Reviewing the Certificate of Incorporation

1. Rights and Preferences of Stock Classes:

  • Your Focus: Examine the equity structure detailed in the Certificate, ensuring it aligns with the Term Sheet and addresses future funding rounds' potential impacts. Compare the rights of Preferred and Common stock. Preferred stock often has priority in dividends and assets upon liquidation but may have limited voting rights.

2. Anti-Dilution Provisions:

  • Your Focus: Assess the specific mechanisms, such as full ratchet or weighted average, and their implications in various market scenarios, including down-round financing. Ensure it aligns with the Term Sheet.

3. Board Composition and Voting Rights:

  • Your Focus: Ensure such rights are aligns with the Term Sheet and the Voting Agreement.

4. Protective Provisions:

  • Your Focus: Ensure such rights are aligns with the Term Sheet and the Investor Rights Agreement (IRA).

5. Conversion Rights:

  • Your Focus: Analyze the conditions under which Preferred stock can convert to Common stock. Understand the conversion ratios and triggers, such as a sale of the company.

6. Pay-to-Play Provisions:

  • Your Focus: These clauses can affect your rights if you don't participate in future funding rounds. Ensure you're aware of potential penalties.

7. No Impairment Clauses:

  • Your Focus: These broad clauses are designed to protect the agreed terms in the Certificate. Scrutinize them to understand how your rights are safeguarded.

8. Blank Check Preferred Stock:

  • Your Focus: Assess how the board can create new series of stock and its potential impact on your investment.

9. Jurisdictional Nuances:

  • Your Focus: Legal specifics can vary significantly by jurisdiction. If the company is incorporated in a different state from where it operates, be aware of these differences. Pay particular attention to local corporate laws and how they interact with the Certificate's provisions.

Related Articles:

  1. Term Sheet in Venture Financing: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/term-sheet-in-venture-financing)

  2. Share Purchase Agreement: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/share-purchase-agreement-review-guide)

  3. Voting Agreements and Right of First Refusal / Co-sale Agreements: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/voting-and-right-of-first-refusal-agreement-review-guide)

  4. Investor Rights Agreement (IRA) in Venture Financing: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/investor-rights-agreement-review-guide)