Scenario 01

---
name: ecvc-identify-spa-issues-scenario-01
task_id: emerging-companies-venture-capital/identify-spa-issues/scenario-01
description: Identifying issues in a Series B preferred stock purchase agreement from the company's perspective requires flagging departures from market-standard anti-dilution mechanics, assessing expenditure consent thresholds against operational reality, analyzing restrictive covenant enforceability under the governing employment and corporate-law framework, and explaining any pay-to-play conversion mechanism.
activates_for: [planner, solver, checker]
---

# Skill: Identify SPA Issues — Scenario 01

## 1. Subject-matter triage

- Treat the term sheet as the benchmark and the financing documents as the subject of comparison.
- Identify all company-adverse departures from the agreed economics, governance package, and risk allocation.
- Separate true deviations from mere drafting noise, and prioritize only issues that matter to economics, control, enforceability, or closing mechanics.
- If multiple provisions address the same business issue, analyze them together and explain the combined effect.

## 2. Failure modes the skill is correcting

- Anti-dilution terms are named but not translated into their practical effect in a future down round.
- Consent thresholds are stated in dollars without measuring them against the company’s normal operating spend or burn.
- Restrictive covenants are flagged without analyzing whether the governing law or employee-protection regime limits enforceability.
- Pay-to-play mechanics are identified without distinguishing conversion to common from conversion to a residual preferred class.
- Related investor veto rights are treated in isolation, even where they collectively create operational control.
- Issues are described without tying them to the corresponding term sheet position and the resulting client harm.
- The memo states a conclusion without identifying the governing legal or market standard that supports it.

## 3. Legal frameworks / domain conventions that apply

- Preferred stock financings are typically compared against the executed term sheet and against prevailing venture market practice for economics, governance, and downside protection.
- Anti-dilution analysis should distinguish weighted-average protection from full-ratchet protection; full ratchet is materially more investor-favorable and can shift dilution disproportionately to founders and common holders in a down round.
- Expenditure and operating veto rights should be tested for proportionality to the company’s ordinary course budget, burn rate, and need for rapid vendor and hiring decisions.
- Restrictive covenants must be assessed under the governing corporate and employment-law framework, including any limitations on post-employment non-competes and any choice-of-law or forum provisions that affect enforceability.
- Pay-to-play provisions should be read for the consequence of non-participation, including whether the sanction is conversion to common or to a shadow preferred class with residual preference rights.
- Consent rights, board rights, observer rights, and protective provisions should be analyzed together where they create de facto control or impede ordinary operations.
- For each legal proposition, cite the controlling authority or market standard supporting the point, using the governing law or the authority reflected in the source documents where available.

## 4. Analytical scaffolds

- Start by mapping each financing document provision to the matching term sheet provision.
- For each divergence, identify:
  - the provision and its exact function,
  - the market or legal standard,
  - the economic or control consequence,
  - the severity,
  - the recommended fix.
- For anti-dilution:
  - state the mechanism,
  - compare it to the market baseline,
  - explain the effect in a hypothetical future lower-price financing,
  - note whether the term sheet already contemplated that allocation.
- For expenditure or operating consent rights:
  - measure the trigger against monthly burn or ordinary-course spend,
  - determine whether routine operations would require investor approval,
  - assess whether neighboring veto rights worsen the practical control burden.
- For restrictive covenants:
  - identify the bound parties,
  - identify the duration, scope, and activity restrictions,
  - test enforceability under the governing law framework,
  - explain whether the clause is likely to be narrowed, unenforceable, or commercially overbroad.
- For pay-to-play:
  - identify the trigger and sanction,
  - compare the result to the term sheet,
  - explain the dilution and preference consequences for non-participating holders.
- For every issue, close the analysis by tying it to the relevant scale or threshold in the documents, the interacting provision, and the downstream consequence for the client.

## 5. Vertical / structural / temporal relationships

- Read the financing package vertically: term sheet, SPA, certificate, investor rights documents, voting agreements, and ancillary schedules should be consistent.
- Read horizontally across provisions that operate on the same trigger, such as consent rights, protective provisions, transfer restrictions, and voting thresholds.
- Treat timing-sensitive provisions as a sequence: signing, closing, post-closing covenants, future financings, and exit events may allocate rights differently at each stage.
- If a clause is conditioned on a later event, identify what happens before the event, at the event, and after the event.
- If one clause softens or hardens another, explain the combined practical result rather than analyzing the clauses in isolation.

## 6. Output structure conventions

- Produce an issues memo in clear ordinal severity buckets: Critical, High, Medium, Low.
- State the severity once for each issue and use it consistently.
- For each issue, use a compact issue format:
  - Provision
  - What changed / why it matters
  - Standard or authority
  - Severity
  - Client impact
  - Recommended fix
- Organize issues from most to least consequential.
- Include a short comparison to the executed term sheet for each material issue.
- Where helpful, quantify the issue using the document’s own figures or thresholds, but do not invent transaction-specific numbers.
- Include a final Recommended Actions block with imperative steps, the responsible role, and a timing anchor tied to the deal timeline.
- Use market-conventional drafting for proposed fixes; keep the recommendations implementation-oriented, not abstract.