Understanding Venture Investment Documentation
Venture capital-backed companies, especially in Silicon Valley, typically have a set of corporate documents and agreements governing the rights and obligations among them and their investors. Many use forms from the National Venture Capital Association (NVCA), though variations are common.
Certificate of IncorporationThe Certificate of Incorporation is a document filed with the Secretary of State in the state where the corporation is organized (which, for most venture-backed corporations, is Delaware). The certificate defines the name, registered address, purposes, and stock classes of the corporation.
Most importantly in venture-backed corporations, the certificate of incorporation typically defines the rights associated with each class of stock, including voting rights, dividend rights, and conversion and redemption triggers.
In Delaware, certificates of incorporation are publicly recorded. Anyone can download the certificate of incorporation for any Delaware corporation by paying a small fee.
Voting AgreementVoting agreements govern the election of the board of directors by the stockholders. The voting agreement will usually provide for each class of stockholders to have certain board nomination rights, and will require that each stockholder vote their shares to elect the nominated directors.
Some voting agreements also provide for “drag-along rights,” under which a certain majority of stockholders can force other voting agreement parties to join a sale of stock.
Right of First Refusal and Co-Sale AgreementThe “right of first refusal” is a right for the corporation and its investors to purchase any stock that a key stockholder wishes to sell. The “right of co-sale” is a right for other investors to join in such a sale if the right of first refusal is not exercised.
These agreements also typically include “lock-up” provisions that prevent sales of stock by key stockholders around the time of an IPO.
Investor Rights AgreementThese agreements cover several categories of “investor rights.”
The first category is “registration rights,” rights to demand the registration of stock with the U.S. Securities and Exchange Commission so that it can be offered to the public.
The second category is “information rights,” rights to access company financial information and, in some cases, to sit in on its board meetings.
The third category is “rights of first offer,” which allow key stockholders to join any new securities offerings by the company.
Investor rights agreements may also impose restrictions on company management, and grant key stockholders certain veto rights, as a means of protecting their investments.
Stock Purchase AgreementThe stock purchase agreement governs the process for becoming a stockholder, and typically includes a disclosure schedule that outlines key information regarding the corporation and its business.