Stock Purchase Agreement

A Stock Purchase Agreement (SPA) is the principal closing document in a priced equity financing, governing the sale and purchase of newly-issued preferred stock. It contains the financing terms (share count, price, closing date), the company's representations and warranties to investors, the conditions that must be satisfied before closing, the indemnification structure if reps prove untrue, and the closing mechanics. It is the "definitive document" of the priced round, accompanied by the certificate of incorporation amendment, the Investor Rights Agreement, the Voting Agreement, and the Right of First Refusal and Co-Sale Agreement (ROFR/Co-Sale).

The standard content of a Stock Purchase Agreement:

• Recitals: identifies the parties (company and investors) and references the broader transaction.
• Purchase and sale: specifies the share count, share price, and aggregate purchase price for each investor.
• Representations and warranties of the company: extensive list of statements about the company's status, capitalization, contracts, IP, litigation, taxes, employees, and other material matters. These are the company's promises about the truth of its disclosed information.
• Representations of investors: typically narrower, including accredited investor status, investment intent, sophistication, and authority.
• Conditions to closing: items that must be true or satisfied before the deal can close (closing conditions covered in more detail in the term sheet and operationalized in the SPA).
• Covenants: things the company agrees to do or not do between signing and closing, and sometimes post-closing (e.g., maintain D&O insurance, comply with reporting obligations).
• Indemnification: the structure for compensating investors if the company's reps and warranties prove false, including survival periods, caps, baskets, and exclusions.
• Termination provisions: when and how the SPA can be terminated before closing.
• Miscellaneous: governing law, dispute resolution, notice provisions, integration clauses.

The reps and warranties section is where most negotiation happens. The company makes detailed statements about virtually every aspect of its business, with material misstatements creating indemnification exposure. Standard areas of reps include:

• Organization and authorization: company is properly incorporated, has authority to enter the transaction.
• Capitalization: cap table is accurate and complete.
• Financial statements: financials are accurate and prepared in accordance with GAAP.
• Contracts: material contracts have been disclosed, none are in default.
• Intellectual property: company owns or has rights to all IP it uses, no infringement.
• Litigation: pending or threatened litigation has been disclosed.
• Taxes: tax filings are current and accurate.
• Employees: employee matters are properly handled (IP assignments, restrictive covenants, etc.).
• Compliance: company is in compliance with applicable laws.

The disclosure schedule: the SPA references a "Disclosure Schedule" where the company carves out specific exceptions to the reps. For instance, if a rep says "no pending litigation," the disclosure schedule lists any matters that would be exceptions. The disclosure schedule is where many of the practical exceptions live and is heavily negotiated.

What founders get wrong: Treating reps and warranties as boilerplate they don't need to verify. Reps are personal promises (sometimes with personal indemnification exposure for founders) that the disclosed information is true. Missing a disclosure creates indemnification exposure post-closing, and the cleanup is expensive. The right discipline: at SPA drafting, read every rep, verify with the responsible specialist, and disclose proactively in the disclosure schedule. The legal cost of doing diligence-grade work on the disclosure schedule is much smaller than the post-closing exposure from missed disclosures.

Related: Subscription Agreement · Closing Conditions · Due Diligence · Preferred Stock · Representations and Warranties

FAQ

What is a Stock Purchase Agreement?
The principal closing document in a priced equity financing, governing the company's sale and the investor's purchase of newly-issued preferred stock. Contains the financing terms, the company's representations and warranties, the conditions to closing, the indemnification structure, and the closing mechanics.

What are the main sections of an SPA?
Recitals (parties), purchase and sale (terms), reps and warranties of the company (extensive promises about the business), reps of investors (narrower), conditions to closing, covenants, indemnification, termination provisions, and miscellaneous (governing law, etc.). The reps and warranties section is the most heavily negotiated.

What's the disclosure schedule?
A document referenced by the SPA where the company carves out specific exceptions to the reps. If a rep says "no pending litigation," the disclosure schedule lists matters that would be exceptions. Heavily negotiated; the right discipline is to disclose proactively to reduce indemnification exposure.