Equity Financing Documents: The Legal Agreements Behind Your Financing

You’ve agreed on a term sheet, and all you have to do is “draw up the documents” for the equity financing before the closing. How hard can it be? During this phase of the financing, the lawyers will be drafting your financing documents (aka “drawing up the documents”) and there may be some iteration on drafts as they go between the company counsel and the investor counsel. Below I lay out the documents that are typically being drafted in a Series A (B, C, etc.) that is using standard NVCA (National Venture Capital Association) templates. If your lawyer is not using the NVCA templates as a starting point yours could look different (more on that later).

Main Transaction Documents

One bucket of documents that has to be drawn up can be considered the main transactional documents. These documents are the heart of the financing, contain the most important terms, and typically consist of:

• Amended and Restated Charter (a Charter is also called a Certificate of Incorporation): This document establishes the company’s authorized shares and par value, among other things. It is not official until it is filed with Delaware.
• Stock Purchase Agreement: This will lay out what investors are buying—the number of shares and for how much money. This agreement includes a disclosure schedule.
• Voting Agreement: This lays out the board members and future rights to board seats, as well as drag-along rights (if any).
• Right of First Refusal and Co-Sale Agreement: This prevents the founder (or other keyholder) from selling shares to a third party without first asking both your company and your company’s investors if they want to buy the shares first, and only if they say no can you proceed.
• Investor Rights Agreement: This includes registration rights, rights to future stock issuances (i.e. you might have to allow the past investors to buy stock in future financings), and information and observer rights (the investor might have the right to view your financials or other numbers every so often, and might be able to observe your board meetings despite not being a board member).

Ancillary Documents

Ancillary documents are typically more focused on the less central aspects of the financing, instead of the meaty terms. They typically consist of:

• Officer Certificate (sometimes called a Compliance Certificate): The officer (usually the CEO) certifies that the company representative looked at the representations and the disclosure schedules and certifies they’re accurate. 
• Secretary Certificate: The secretary certifies that the attachments to this certificate include the current bylaws of the company, its charter, and the board and stockholder resolutions that approved the financing.
• Good Standing Certificate: A certificate that must be ordered from Delaware (if the company is a Delaware Corporation) where Delaware vouches that the company is in good standing in Delaware (stating it has paid all state taxes owed, it is a real company, and the date that it incorporated).
• Management Rights Letters: A management rights letter for a venture capital firm usually just makes sure that the venture capital firm has a right to manage and meet with the leaders of the startup. As an example, “the Investor shall be entitled to consult with and advise the management of the Company on significant business issues.” It also makes official the investor’s rights to look at the startup’s books, “the Company shall permit the Investor, at the Investor’s expense, to visit and inspect the Company’s properties, to examine its books of account and records, to request and receive additional information relating to the Company’s financial condition.”  
• Indemnification Agreements: These are usually for new board members. Indemnification is the obligation of the company to reimburse a director or officer for costs or losses she or he suffers as a result of actions taken as a director or officer.
• Legal Opinion: This is often the last ancillary document that’s circulated and comes from the law firm. It is the startup’s legal counsel stating that the shares are properly issued and fully paid, and that the cap table is indeed what the startup says it is.
• Stock Certificates: Stock certificates confirm a person or entity really owns shares. They are either pieces of paper or electronic.

• Amendment of SIP (if applicable): This is a document memorializing the amendment of the Stock Incentive Plan.

• Board Consent and Shareholder Consent: These documents are where the board and shareholders give their consent for the financing, which is necessary for the financing to move forward.

It’s worth mentioning again that these documents I’ve listed above are the typical documents for a Series A (B,C, etc.) that use standard NVCA (National Venture Capital Association) templates. Your lawyer may always choose to modify titles or combine documents. Or you may choose to do a Series Seed as your first equity round instead of an A, and the seed suite of documents are different templates consisting of fewer (and shorter) documents. Working closely with you lawyer and knowing a bit about the process ahead of time will go a long way in efficiently getting through the “drawing up the documents” stage and reaching your closing.

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Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

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