Preferred Stock Purchase Agreement

A Preferred Stock Purchase Agreement (PSPA) is a contract between a company and an investor outlining the terms under which the investor will purchase preferred stock in the company. Preferred stock generally offers certain benefits over common stock, such as dividend preferences, liquidation preferences, and other rights. This agreement details these terms and helps both parties understand their rights and obligations.

Here’s a comprehensive outline of what a Preferred Stock Purchase Agreement typically includes:

1. Parties Involved

• Company: Full legal name, address, and contact information.
• Investor: Full legal name, address, and contact information.

2. Recitals

• Background: Overview of the purpose of the agreement, including the intent to purchase and issue preferred stock.

3. Definitions

• Definitions: Definitions of key terms used in the agreement, such as "Preferred Stock," "Dividend," "Liquidation Preference," and "Conversion Rights."

4. Sale and Purchase of Preferred Stock

• Issuance of Preferred Stock: Description of the preferred stock being issued, including:
  • Class/Series: The specific class or series of preferred stock.
  • Number of Shares: The number of shares being issued.
  • Purchase Price: The price per share of preferred stock.
• Closing Date: The date on which the purchase will be completed, and the preferred stock will be issued.

5. Representations and Warranties

• Company’s Representations:
  • Authority and Authorization: Assurance that the company has the authority to issue the preferred stock and enter into the agreement.
  • Capitalization: Information about the company's capitalization structure and any outstanding stock.
  • Compliance: Assurance that the issuance of the preferred stock complies with applicable laws and regulations.
  • Financial Statements: Accuracy of the company’s financial statements and other disclosures.
• Investor’s Representations:
  • Investment Intent: Assurance that the investment is for personal account and not for resale.
  • Knowledge and Experience: The investor's ability to understand and evaluate the risks of the investment.
  • Compliance with Laws: Assurance that the investment complies with applicable laws and regulations.

6. Rights and Preferences of Preferred Stock

• Dividends: Details on dividend rights, including the dividend rate and payment schedule.
• Liquidation Preference: Terms outlining the preference of preferred stock in the event of liquidation or sale of the company.
• Conversion Rights: Conditions under which preferred stock can be converted into common stock, including conversion ratio and mechanisms.
• Anti-Dilution Protection: Provisions protecting the investor from dilution in the event of future stock issuances.
• Voting Rights: Details on the voting rights of preferred stockholders, if any.

7. Covenants

• Company Covenants: Obligations of the company regarding the use of proceeds, maintenance of corporate records, and compliance with laws.
• Investor Covenants: Any commitments made by the investor, such as confidentiality agreements or restrictions on transferring shares.

8. Conditions Precedent

• Conditions: Conditions that must be met before the closing, such as obtaining necessary approvals, consents, or regulatory clearances.

9. Indemnification

• Company’s Indemnity: Terms under which the company will indemnify the investor for claims related to breaches of the agreement or misrepresentations.
• Investor’s Indemnity: Terms under which the investor will indemnify the company for claims related to the investor’s representations and warranties.

10. Confidentiality

• Confidentiality Obligations: Terms for keeping the details of the agreement and any related information confidential.

11. Governing Law and Dispute Resolution

• Governing Law: The jurisdiction whose laws will govern the agreement.
• Dispute Resolution: Mechanisms for resolving disputes, such as mediation, arbitration, or litigation.

12. Miscellaneous Provisions

• Amendments: How changes to the agreement must be made.
• Entire Agreement: Clause stating that the agreement constitutes the entire agreement and supersedes any prior negotiations or understandings.
• Notices: Procedures for formal communications between the parties.
• Severability: Provision for handling any part of the agreement that may be found invalid or unenforceable.

13. Signatures

• Company’s Signature: Space for the company’s authorized representative’s signature and date.
• Investor’s Signature: Space for the investor’s signature and date.

14. Exhibits and Attachments

• Exhibit A: Detailed description of the preferred stock, including rights, preferences, and terms.
• Exhibit B: Any relevant documentation, such as financial statements, legal opinions, or approval certificates.

Additional Considerations:

1. Due Diligence: Investors should conduct thorough due diligence to understand the company's financial health, business prospects, and legal standing.
2. Legal and Financial Advice: Engage legal and financial professionals to review the agreement and ensure that it aligns with both parties' interests and complies with applicable laws.
3. Regulatory Compliance: Ensure compliance with securities laws and regulations relevant to the issuance of preferred stock.

A well-drafted Preferred Stock Purchase Agreement helps establish clear terms for the investment, protects the interests of both the company and the investor, and facilitates a smooth transaction.