Anatomy of a Venture Capital Transaction 203 Understanding the Legal Documents The actual executed legal documents described in the term sheet must reflect the end result of the negotiation process between you and the venture capital- ist. These documents contain all the legal rights and obligations of the par- ties, and they generally include the investment agreement, a preferred-stock resolution (to amend the corporate charter), a stockholders agreement, an em- ployment and confidentiality agreement, a contingent proxy, and a registration rights agreement. You may also have to execute a warrant, debenture, or notes, and obtain a legal opinion of company counsel. The Investment Agreement This is where you'll find all the material terms of the financing. The investment agreement also serves as a form of disclosure document because the repre- sentations and warranties portion covers the relevant financial and historical information that you make available to the investor. The representations and warranties (and any exhibits) also provide a basis for evaluating the risk of the investment and the structure of the transaction. The representations and warranties section includes the following (the appendix includes some sample representations and warranties that a typical growth company is likely to be expected to make to investors): l l Organization, qualifications, and corporate power. This section de- fines the legal structure of the company and attests that it is in good standing. l l Authorization of agreement. The company has the legal power to enter into the agreement, and any shares issued will be valid. l l Validity. The agreement will be legally binding. l l Capital stock. This section specifies how much stock will be issued and at what price. l l Financial statements. This section stipulates that investors have re- ceived the latest financial statements. l l Actions pending. An assurance that there are no legal actions pending against the company is provided. l l Trade secrets. No employees have violated any third-party agreements with regard to trade secrets of the third party. l l Governmental approvals. There are no governmental approvals, con- sents, or filings necessary for the agreement to be validated. American Management Association www.amanet.org