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  • Jason Trueblood

Top 3 craziest things we’ve found in deal documents

Updated: Mar 10

What comes to mind when you hear “Wait, what happened?” or “Wow, how does that get missed?” coming from someone in your office?


At Aumni, any uncertainty around your corporate file (or legal record and source of truth) is rarely a good thing.  Our team has been conducting deal document audits uncovering significant issues that could be prevented with the proper processes in place.


By uncovering countless examples of these unfortunate circumstances, we’re aiming to educate the market and discuss how to prevent these issues from striking again.


With that said, the following are three anonymous examples of actual document errors uncovered by Aumni team which may be lurking in your corporate file and data library:


Bronze

Closing a portfolio investment can be an extremely hectic time for a venture capital firm.  With so many moving pieces culminating into closing day, the moments following a closing often bring on an anticipated  breath of fresh air. The money has been wired, the deal has closed, so what could have been missed?

How about signed documents?


In multiple cases when reviewing client document libraries, Aumni has discovered the investor never received a complete, executed closing set.  Without these critical documents in hand, the fund could find themselves in a legal quandary down the road. If the issue isn’t caught soon enough and the deal happened years ago, it’s possible the company is shuttered -- good luck getting copies of signed documents at that point. To avoid overlooking or verifying that you have the right documents in hand, remember to implement these 3 key best practices immediately after a closing:


  • Documents need to be signed and in non-editable PDF format (Word documents don’t count)

  • Confirm your firm is listed on the schedule of purchasers (this may seem obvious but can often be overlooked.)

  • Once documents are received they should be organized and uploaded into a file management system such as AWS or Google Drive.


Prevention of this issue requires discipline and focus throughout the process.  Aumni’s portfolio intelligence platform serves as a check and balance system for investors to ensure their closing sets are truly finalized, complete and accurate.


Silver

The schedule of purchasers in any equity financing round plainly outlines who purchased stock in the company, how much stock they purchased, and when it was purchased.  This document is legal proof that an investor owns a security in a company; without it, there is little legal evidence to suggest the investor ever invested. Believe it or not, Aumni’s team has uncovered instances where investors have wired funds to a company and were omitted from the schedule of purchasers.


This is one of those “Fire Drill” moments that can cause investors to scramble for answers and demand an updated and accurate closing set.  For example, signatories should make a habit of verifying their actual legal name on the schedule of purchasers before signing and wiring. Investors should also consider having past investments audited to ensure they weren't omitted from the purchaser schedule in legacy investments. Aumni eliminates this headache through its robust system of audit and analysis of your investment agreements.


Gold

When a company is initially incorporated, its officers set aside a specific amount of shares to issue to its stockholders .  Specifically, the number of authorized shares is set forth in the company charter filed with the applicable state of incorporation.


When drafting, updating, and circulating the closing set during a financing round, it’s possible that founders sell more shares than have been authorized in the company charter.  This usually occurs during complex rounds with many investors, where share counts are repeatedly revised but aren’t routinely added together and compared against the total authorized amount.  Angst, moving pieces and fast-approaching closing dates add to the stress of negotiating with an investor pool, which can result in this costly human error - to put it short, closings are often described among dealmakers as “fire drill” type experiences. If the documents are signed and the number of shares purchased by participating investors exceeds the amount authorized in the charter, the company has oversubscribed the round and possibly triggered a serious violation of the applicable corporate statute.


Is this an issue?  Yes, a very substantial one.  Since the company sold more shares than are authorized, investors (even minority investors) would have a legal right to rescind their original investment, leaving the company with an undersubscribed round, skewed ownership percentages, and a worsened reputation among investors.


At this point you may be asking, “How in the world does this happen?”  At Aumni, we take pride in our auditing and analysis processes to uncover these issues, preventing problematic legal issues before they happen.