Definitive Documents

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Updated August 29, 2023
Angel Investing

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The term sheet outlines the details of a specific financing and is usually non-binding (save perhaps for exclusivity and confidentiality clauses). For the deal to be closed, legal contracts representing the details of the investment terms need to be drafted, negotiated, and signed. These contracts and potentially amendments to corporate documents are referred to as the definitive documents.

Closing refers to the moment at which you sign the definitive documents requiring your signature, and send the company your money, typically either in the form of a check or a wire transfer. The company signs the required documents and delivers to you the security purchased.

What definitive documents are will depend on the specifics of the transaction, but they typically include:

  • The note or the convertible equity instrument, in the event of a convertible note or convertible equity financing;

  • In a preferred stock financing, in addition to the purchase agreement, you might have an Investor Rights Agreement, a Voting Agreement, and a right of first refusal and co-sale rights.

  • The security you purchased could take the form of an original copy of the convertible note you bought, or common or preferred stock certificates accompanied by the stock purchase agreements executed by all parties. Increasingly, the stock certificates are represented electronically through systems such as Carta.

There are often multiple ways to express a desired outcome within the definitive documents, and different lawyers will have their own language they prefer. However, any aspect of the deal that will materially impact the cost per share or the rights of the investor should be worked out as part of negotiating the term sheet. It’s cheaper to figure things out during the term sheet stage, where you might have just two pages to get through, than during the definitive documents stage, where the documentation can be hundreds of pages and cost a lot of money in legal fees to develop. Every major term that you care about should be represented in the term sheet, and then it’s the lawyer’s job to organize them and add a bunch of agreements, charter amendments, and so on in the definitive documents. The point is, the definitive documents are typically several sets of documents that will express in detail and make binding all the things you worked out in the term sheet. They are two different things, two different parts of the process, and two different sets of paper. But the definitive documents should reflect the understandings reached in the term sheet.

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