The Structure of a Venture Capital Investment

The Stock Purchase Agreement
Once the company and the venture capitalist agree on the terms sheet -- a summary of the proposed terms and conditions for the investment -- the venture capitalist's attorneys usually prepare the definitive agreements reflecting the transaction.

The main agreement will be the stock purchase agreement, which typically contains the following information:

• The price of stock to be sold and the number of shares to be purchased
• Representations and warranties of the company
• Covenants of the company
• Conditions to closing of the deal
• A requirement to reimburse the venture capitalist's legal fees
• Exhibits and related agreements, which contain other rights for the venture capitalist

Representations and Warranties
Representations and warranties from the company are almost always present as part of a venture capital investment. The company is expected to represent its financial and operational condition and outlook. A breach of the company's representations and warranties can lead to a real problem for the company, giving the investor various remedies laid out in the agreement.

Representations and warranties can go on for pages, because venture capitalists want to flush out any "warts" in advance. Some of the most common representations that companies are expected to make include:

• The exact outstanding capitalization of the company
• That the company's financial statements are true and correct in all basic respects and have been prepared in accordance with generally accepted accounting procedures
• That the company has no liabilities other than those reflected in its most recent balance sheet or occurring in the ordinary course of business since the date of the last balance sheet
• That the company owns all of the assets it claims to own, without liens or encumbrances except those disclosed
• That the company's intellectual property and products don't infringe the rights of others
• That the company is in compliance with all relevant laws that govern its operations