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Series A Financings

—RMZ

The City of Chicago has emerged in recent years as one of the nation’s primary entrepreneurial hubs and continues to gain momentum with the leadership of organizations like 1871 and Impact Engine, top talent graduating from the country’s best universities located down the street, and a rise in the number of venture capital funds in Chicago.  Situated in Chicago’s Loop, we have guided our clients – both venture capitalists and businesses seeking an infusion of capital – through one of the most common investment transactions in the venture capital arena: the Series A financing.

Series A financings typically involve the sale of 15-30% of the equity in a company to a venture capital firm in the form of Series A convertible preferred stock.  The mechanism of that sale is the Stock Purchase Agreement, which contains the terms of the sale, the representations and warranties of the company (including the company’s capitalization structure), and the ever-important disclosure schedule that qualifies such representations, among many other terms and conditions.  Although it serves as the central mechanism of the sale process, the Stock Purchase Agreement is rarely, if ever, the only document in the financing transaction.

A company seeking a venture capital investment should expect that as a condition of the investment, the company will be required to convert into a Delaware corporation if it was not initially formed as such.  The conversion process is often straightforward, and culminates in the filing of a new company Charter.  If the company was already formed as a Delaware corporation, an Amended and Restated Charter is typically required.  The Charter establishes many of the critical rights and obligations of the various classes of stockholders, including dividend rights, conversion rights, liquidation preferences, the election of directors by particular classes, and many others.

Depending on the company’s business and the size of the investment being made, the Series A financing may include other agreements such as a Voting Agreement, a Stockholders’ Agreement, an Investors’ Rights Agreement, a Right of First Refusal Agreement, and a Founders Stock Restriction Agreement.  The terms of each of these agreements are critically important to both the company and the investors and cannot be overlooked.  For companies and investors that are looking to become more familiar with the basic structure and the provisions commonly found in each of these agreements, the National Venture Capital Association may be a worthy starting point.