How To Benefit From A Preferred Stock Purchase Agreement

The preferred stock purchase agreement is a part of a set of investment documents that together govern the legal rights of the concerned parties to the investment as well as the legalities of the operations of the company, once the investment has been made. The preferred stock purchase agreement will contain a number of terms and these include to get the investor to commit to purchase newly issued securities in the form of preferred stock, promissory notes and stock purchase warrants or a combination of the three and which may either be purchased in one go or over a period of time.

The preferred stock purchase agreement shall also set out the representations and warranties of the company relating to all of its material facts and this may also include disclosing any other material arrangements. It shall also include representations of the investor as a purchaser of the stock. The preferred stock purchase agreement shall also define all positive and negative covenants of the company that may, if breached, cause changes to be made in the company such as changing the composition of the Board of Directors, default outstanding payments etc.

The provisions and warranties specified in the preferred stock purchase agreement shall enable the due diligence report as well as allow the contract to be voided, in case of a breach. The exact terms of the stock purchased will be contained in the articles of incorporation of the company or in its charter of incorporation that defines the legal entity, especially for preferred stock or even for common stock.

As far as convertible securities are concerned, especially preferred stock or for warrants, there shall be an "anti dilution" clause that protects the buyer from paying additional cost for stocks that he may want to purchase subsequent to a new issue, at a price that may be less than the "as converted" common stock price paid by the purchaser. Anti dilution can be a complex matter that may take the form of "full ratchet" or "weighed average" formula.

Some other common terms used in the preferred stock purchase agreement are acceptable currency, which defines what method of payment, including cash shall result in the payment being credited in the company's account. Also used is the term best knowledge, which defines a person's knowledge which, in turn, may include knowledge about the officers and directors of the company or other knowledge that a prudent businessman may be able to obtain for managing his business after having made inquiries in a diligent manner.

The closing date will be the date on which the purchase has been finalized and the purchaser or investor has bought the preferred stock. Financial statements refers to all statements pertaining to the financial position of the company, which have been certified by the company's independent certified accountant plus those statements, though not certified but which contain most of the information contained in the certified statements.

As can be inferred, the preferred stock purchase agreement is a comprehensive document that requires detailed information and which would require a lot of effort in preparation. So it is better to purchase a pre-defined agreement which is available for less than fifty dollars and which represents a huge saving in terms of expert fees, lawyer's charges as well as research. It can be purchased off the shelf and be tailored to suit individual needs and has all the salient points of a good preferred stock purchase agreement contained within.