in this lesson, we're going to talk about Stock-Related Agreements and these will come into play whenever you're issuing stocks or equity or any other securities as part of your business operations. So, in this lesson, we'll talk about the stock purchase agreement, we'll talk about buy sell agreements and also co-sale agreements. Let's talk about the stock purchase agreement. The stock purchase agreement is essentially the financing agreement, the instrument that you use to outline what the terms of the agreement is between you and the investor, you're issuing stock shares too. Now, what happens is the party's you and the investor, you negotiate all of the key terms of the agreement and reduce those to what we call a term sheet. That then the lawyers for both sides will take the term sheet and use that as an outline to draft the larger financing instrument, the financing agreement. That financial agreement is what we call the stock purchase agreement, we should say something here about the legal effect of the term sheet. Now, typically, the term sheet itself is a non binding agreement, meaning that the parties aren't necessarily held to the terms that they have agreed upon in the term sheet, that's only if the parties continued to negotiate in good faith. Now, what a court can do is if you're not negotiating in good faith. So if the time between the term sheet and the final stock purchase agreement, you walk away from the deal or you aren't engaging in good faith negotiations with the other side, a court could hold you to the agreement that you made in the term sheet. So, the lesson there is to be sure that as you're negotiating with your investor early on, before you reduce this to a term sheet. That you feel pretty good about the key terms of that agreement that will lessen the opportunities or lessen the chance that you will walk away from a key term during the process between the term sheet and the stock purchase agreement. So, after our stock purchase agreement is drafted by the lawyers, then you'll have an opportunity to sign a binding agreement, a binding contract, which is the stock purchase agreement. So, the key terms that you want to think about in your stock purchase agreement and these key terms or things that you want to make sure you discuss with your investor and are addressed in the term sheet before the agreement is finalized. The key terms are the description of the security here, you want to talk about the number of shares that are being issued, at what price and the date at which the shares will be issued. He's a very important terms to make sure both parties have an understanding of and have an agreement on. Also, oftentimes, in the term sheet and ultimately, in the stock purchase agreement, both sides will make a series of representations and warranties. These representations include representations about the financial health of your company. What your competitive outlook looks like, warranties around intellectual property, identification, these types of things or things that both sides want to be sure that they understand before reducing your key terms to a term sheet. And then the stock purchase agreement, also a covenant and closing conditions typically before security can be issued, it may require changes to your charter documents. So, for example, if you've incorporated your business, you found an article of articles of incorporation which got your business started. In that articles of incorporation, you would have had to lay out the type of shares that are issued in the company, the type of shares and the number of shares. So to the extent in the stock purchase agreement, you're issuing more shares or different shares, maybe you're not doing common stock, you're doing preferred stock. And so, if you're changing the number or type of shares that you're issuing from your corporation, that's going to require a change in that articles of incorporation that you filed to get your company started. So, in this stock purchase agreement, some of the conditions may be that you're required to go and change your articles of incorporation before the agreement takes effect, covenants or promises that both sides are making in the agreement either promises to do something or promises not to do something. Any of those are part of the agreement between you and the investor. You want to make sure that those are all spelled out pretty clearly both in the term sheep and ultimately, in the final stock purchase agreement, let's talk about a few rights that investors typically will insist upon. The first one is the right of first refusal, this essentially means that if you're participating in future rounds of funding or you're selling other shares, investors usually insist upon the right to have the ability to purchase shares before others, or the right to convert their shares from preferred stock to common stock. Another right is also the right of co-sale and this, we'll talk about co--sale agreements, in a few minutes here, but the right, of cosale is essentially a right that investors insist upon to participate in this with other shareholders, sell their shares. Investors want to make sure that they can participate in that sale as well. And again, registration rights is another right that investors want to make sure that they have, these investors rights or things that you want to make sure you understand what the investor needs and what the investors insisting upon. So you can determine from your perspective whether you want to have these as part of your term sheet and ultimately, you're in agreement. Let's talk about buy sell agreements, buy sell agreements are designed to provide liquidity to shareholders while limiting the stock ownership. So, as the founder and owner of your company, you may want to make sure that you have a good handle on how many people have an equity stake in your company, how many people actually own a piece of your company? And what buy sell agreements do they allow you to give some cash equivalent some liquidity to your shareholders without allowing them to be owners of the company. It provides limitations on the transfer of shares, so you can essentially prevent a shareholder from selling the shares to 3rd parties. That allows you to ensure that you know exactly who has stock ownership in your company. You can also have limitations on the type of people that shareholders could sell their stock to. These types of agreements are typically you want to put in place early on which are early investors or early stockholders in your company, so that you can ensure that you manage the amount of stock that's being issued, before your company decides to have an exit to be sold or to go public. And the purchase price for your shares is another key component that you want to include if you decide to do buy sell agreement. Now, let's, circle back to the idea of a coastal agreement. These not only are co-sale, co-sale is a right that investors insist upon, but also, investors oftentimes want to enter into a separate wholesale agreement. This is typically used by venture capitalists and this is because venture capitalists want to make sure that they are protecting their equity interests in your company. This allows the holder of the co-sale right to participate in sales by other shareholders. Now, this is used by VCS and founders and both of those scenarios are kind of the flip of each other. First of all from a VC standpoint, you want to have a coastal agreement with the founders so that, if a founder decides to sell his or her shares in the company as a VC, you don't want to be left with a company who's lost its founders. And so you may want to insist upon as a VC you want to insist upon if the founders sell their stock. The VC has also has a right to sell, sell stock and the reverse of that is also true as a founder of a company and you're dealing with your venture capitalists or other investors who may be selling their shares in the company. A founder may not want to find his or herself in a situation where VCs have sold their shares to other parties and the founder is left as a minority stakeholder and his or her own company. And so as a result of that, oftentimes, founders want to make sure they consider having a co-sale agreement with their funders. Such that if those VCs decided to sell their shares to third parties, the founders can also participate in that cell to ensure that they maintain a majority stake in the company. So as a matter of summary stock purchase agreements outlined the details of a sale or transfer of equity interests in your company. Buy sell agreements, they have the ability to allow liquidity to your shareholders, who are limiting the amount of people that have an equity stake in your company, in what co-sale agreements do is they force participation in the sale of shares by other shareholders. And this is a good way for founders both to protect their majority interest in a company. And on the flip side, it allows VCs to protect themselves from being stuck with a company whose founders have left.
