Preferred Stock Purchase Agreement Template

In plain language: Establishes the core transaction — the company agrees to sell, and each investor agrees to buy, a specified number of preferred shares at a defined price per share.

Common mistake: Failing to attach or finalize the investor schedule (Exhibit A) before signing. An unsigned or incomplete schedule creates ambiguity about each investor's commitment and share count.

In plain language: The company confirms a defined set of facts as true at closing — including its legal existence, authority to issue shares, capitalization, absence of undisclosed liabilities, and compliance with applicable law.

Common mistake: Using generic boilerplate representations that do not reflect actual company circumstances. If a listed representation is false at closing, it creates immediate indemnification exposure — undisclosed exceptions must be scheduled.

In plain language: Each investor confirms they are legally authorized to invest, are purchasing for their own account, are aware of the risks, and meet accredited investor requirements.

Common mistake: Omitting the accredited investor representation for US-based raises. Selling unregistered securities to non-accredited investors triggers securities law violations regardless of whether a formal disclosure was made.

In plain language: Lists everything that must happen before the company can issue shares and investors must wire funds — such as board approval, restated articles, and execution of related agreements.

Common mistake: Setting conditions that are already completed or impossible to satisfy, or omitting conditions that are actually needed. Either creates a closing risk or an unnecessary escape hatch for a party who changes their mind.

In plain language: Specifies the closing date, location (or remote closing process), how funds are transferred, and when share certificates or electronic ledger entries are delivered.

Common mistake: Omitting wire instructions or leaving the closing date blank. An indefinite closing date allows either party to delay indefinitely, giving leverage to the side that changes its mind.

In plain language: Describes, at least at a high level, how the company intends to deploy the investment capital — product development, sales, operations, or general working capital.

Common mistake: Leaving the use-of-proceeds section entirely blank or excessively vague. While not always legally binding, investors expect a stated purpose and courts may consider it evidence of fraudulent misrepresentation if funds are used contrary to representations.

In plain language: Ongoing obligations the company undertakes after closing — such as delivering financial statements, maintaining insurance, and complying with investor information rights.

Common mistake: Agreeing to audit-level financial reporting requirements the company cannot practically deliver. Startups that promise audited annual financials and then fail to deliver them are technically in breach from year one.

In plain language: Requires each party to compensate the other for losses caused by a breach of their representations, warranties, or covenants, subject to defined caps and survival periods.

Common mistake: No indemnification cap or survival period. Without a cap, a single misrepresentation claim could theoretically exceed the round size; without a survival period, claims remain open indefinitely.

In plain language: Restricts investors from freely transferring preferred shares to third parties and gives the company or other investors the right to purchase shares before they can be sold externally.

Common mistake: Omitting permitted transfer carve-outs for affiliated funds or co-investors. Institutional investors routinely need to transfer shares between fund vehicles — blocking all transfers without exceptions makes the agreement unworkable for professional investors.

In plain language: Specifies which jurisdiction's law governs the agreement and how disputes are resolved — litigation in a named court or binding arbitration.

Common mistake: Choosing a governing law different from the company's state of incorporation without legal advice. Delaware is standard for US corporations — using a different state may produce unexpected results on shareholder rights, fiduciary duties, and appraisal rights.

A preferred stock purchase agreement is a binding contract between a company and one or more investors that governs the issuance and sale of preferred shares in an equity financing round. It sets the purchase price per share, total investment amount, the rights attached to the new share class, representations and warranties from both sides, conditions to closing, and post-closing obligations. It is the primary transaction document for Series Seed, Series A, and later priced rounds.

Preferred stock carries rights that common stock does not — typically a liquidation preference (the right to get invested capital back before common holders in a sale or wind-down), dividend priority, anti-dilution protection, and sometimes board representation rights. Common stock is held by founders and employees; preferred stock is issued to institutional investors in priced rounds. In a below-valuation exit, preferred holders are made whole before common holders receive anything.

A PSPA is almost always executed as part of a suite of transaction documents that includes an Investor Rights Agreement (covering information rights, registration rights, and pro rata), a Voting Agreement (governing board composition and drag-along provisions), and a Right of First Refusal and Co-Sale Agreement (governing share transfers). All four are typically conditions to closing in the PSPA itself, and all are signed simultaneously.

Legal review is strongly recommended for any priced equity round. A PSPA creates enforceable rights that persist for the life of the company — anti-dilution adjustments, liquidation preferences, and indemnification obligations can have multimillion-dollar consequences in a future exit. For seed rounds under $500K with a small number of sophisticated angel investors, a template with counsel review is typically sufficient. Series A and larger rounds almost universally involve law firms on both sides.

A liquidation preference gives preferred stockholders the right to receive their invested capital — and sometimes a multiple of it — before common stockholders receive any proceeds in a sale, merger, or wind-down. A 1x non-participating preference returns exactly the investment amount before common participates. A participating preferred also receives its preference and then shares pro rata in remaining proceeds alongside common — a more investor-friendly term that founders should negotiate carefully.

Anti-dilution protection adjusts the conversion ratio of preferred shares if the company issues new shares at a lower price than the preferred investors paid. Broad-based weighted average anti-dilution is the most common and least punitive form — it adjusts the conversion price based on a formula that accounts for the size of the down round. Full ratchet anti-dilution, which adjusts the price to match the lowest subsequent issuance price, is heavily investor-favorable and rare in founder-friendly term sheets.

Regulation D is a set of SEC rules that exempt private companies from the full registration requirements of the Securities Act of 1933 when they sell securities to accredited investors. Rule 506(b) allows sales to up to 35 sophisticated non-accredited investors alongside unlimited accredited investors; Rule 506(c) allows general solicitation but requires all investors to be verified accredited. Companies must file a Form D with the SEC within 15 days of the first sale and comply with applicable state blue sky laws.

A false representation at closing gives the affected party the right to seek indemnification for resulting losses, and in some cases to rescind the transaction. The severity depends on whether the breach was material, whether it was scheduled as an exception, and the terms of the indemnification clause. Intentional misrepresentation can support a fraud claim with no cap on damages. This is why a thorough Schedule of Exceptions is essential — disclosed exceptions are contractually accepted; undisclosed ones create liability.

A closing condition is a requirement that must be satisfied before the parties are obligated to complete the transaction — for example, filing the amended charter or obtaining board approval. If a condition is not met by the closing date, the party benefiting from that condition can waive it in writing or terminate the agreement without liability. Parties should distinguish between conditions that can be waived and those that are legal prerequisites — filing the amended charter to create the preferred share class cannot be waived.