Who Is Responsible for Drafting the Stock Purchase Agreement: Investor or Startup?

The responsibility for drafting the stock purchase agreement in a startup investment can be a nuanced topic, with no one-size-fits-all answer. This article aims to demystify the process and highlight the implications of who has the final say in drafting the agreement. Understanding these nuances can help both investors and startups navigate the complex landscape of mergers and acquisitions more effectively.

The Role of Legal Counsel

One of the most recurring pieces of advice when dealing with the drafting of a stock purchase agreement is that it is often advantageous for the more sophisticated party to have their legal counsel draft the documents. This recommendation is especially relevant for established investors or seasoned entrepreneurs. The rationale behind this advice is rooted in the inherent biases that legal drafting carries.

Even a “generic” document is not truly generic; it often carries inherent biases that favor one party over the other. Legal drafting is a highly personalized service, with the attorney’s perspective and preferences influencing the terms and language included in the agreement. Therefore, having your legal counsel draft the documents can be advantageous, as you can ensure that the terms and language align with your interests and goals.

Market Negotiations and Equity in Drafting

The process of drafting a stock purchase agreement is often a part of a larger negotiation between the investor and the startup. The investor, being a more sophisticated party, may initially have the upper hand in the negotiation due to their experience and expertise. The startup, on the other hand, might prefer an equal footing in this negotiation.

As a result, the negotiations can become quite dynamic. While the investor’s legal counsel may draft the agreement with a favorable client bias, the startup’s legal counsel will usually try to counterbalance these biases. This counterbalance is not always perfect, and some industry-specific biases may still persist. For example, East Coast lawyers are known for drafting agreements with distinct nuances that cater to their regional preferences.

Costs and Financial Considerations

Another crucial factor to consider is the financial burden associated with the drafting process. The costs of drafting the stock purchase agreement are often shared between the investor and the startup. However, the distribution of these costs can vary widely.

Typically, the investor will be responsible for the initial drafting, but these costs might be reimbursed by the startup only if the deal closes. Alternatively, the costs can be shared in a predefined ratio, regardless of which party pays them initially. In some cases, the startup might bear all the costs, which can be a significant concern for resource-constrained startups.

It is crucial for both parties to ensure that the language of the agreement is robust and legally binding. Often, both parties will have their own legal counsel review the documents, with each party offering assurances that the terms and language align with their interests.

Conclusion

The responsibility for drafting the stock purchase agreement can vary depending on the circumstances and the sophistication of the parties involved. While there is no convention that specifies a unified rule, it is generally recommended that the more sophisticated party (usually the investor) have their legal counsel draft the documents. This can help ensure that the agreement aligns with the investor's interests and goals.