What are the conditions to closing of a Series A financing?
December 15, 2007
Almost all Series A Stock Purchase Agreements are drafted so that they contemplate a signing of the agreement, then a closing after certain conditions are met. These closing conditions may include:
- Representations and warranties are correct and covenants have been complied with;
- Securities laws have been complied with;
- The Certificate of Incorporation has been filed with the Secretary of State of Delaware;
- Ancillary agreements (such as the Investor Rights Agreement, Right of First Refusal and Co-Sale Agreement, Voting Agreement, Indemnification Agreements and Management Rights Letter) have been executed and delivered;
- Various closing certificates (such as an officer’s certificate, secretary’s certificate, and good standing certificates) have been delivered;
- A legal opinion has been delivered;
- Necessary consents and waivers have been obtained;
- The Board consists of specified persons; and
- A minimum number of shares is being sold in the closing.
As a practical matter, most venture financings are signed and closed simultaneously. Once company counsel and investors’ counsel have finalized the financing documents, company counsel collects stockholder consents and files the Certificate of Incorporation. In financings involving multiple investors, wire transfers (and checks) may be sent to a trust account at company counsel prior to or on the closing date. Signature pages for the various documents are also collected by company counsel and investors’ counsel. The funds and signature pages are held in escrow pending the closing. Once company counsel receives confirmation of filing of the Certificate of Incorporation, the financing is deemed closed (assuming that funds are held in escrow with company counsel). Company counsel will then wire transfer the funds to the company (and deliver any checks), which occasionally may occur the day after the official closing due to wire transfer deadlines.
If funds have not been held in escrow, then the investors may initiate wire transfers directly to the company after filing of the Certificate of Incorporation and the financing is deemed closed when the company has received the funds. As a practical matter, stock certificates are typically not delivered to the investors until sometime after the closing, although some investors demand to see a copy of the stock certificate before initiating the wire transfer.