Scenario 02

---
name: ecvc-identify-spa-issues-scenario-02
task_id: emerging-companies-venture-capital/identify-spa-issues/scenario-02
description: Identifying issues in a Series B stock purchase agreement from the company's perspective requires all the analysis from the prior scenario plus evaluating cumulative dividend economics, the interaction between any pro-sandbagging clause and the indemnification cap, and whether protective provisions create concentrated veto control across an investor's blocking positions.
activates_for: [planner, solver, checker]
---

# Skill: Identify SPA Issues — Scenario 02

## 1. Subject-matter triage
- Treat this as a company-side financing issue review, not a drafting exercise.
- Read the executed term sheet, the SPA, disclosure schedules, ancillary investor rights, and any charter amendments as one integrated deal set.
- Triage first by economic dilution, governance control, closing risk, and post-closing liability leakage.
- If multiple investors, classes, periods, or consent rights appear, enumerate them before analyzing cross-effects.

## 2. Failure modes the skill is correcting
- Cumulative dividends are flagged without translating them into accrued exit overhang and common-holder proceeds erosion.
- Protective provisions are listed clause-by-clause without aggregating who can block what across the full control package.
- Anti-dilution, consent thresholds, pay-to-play, and non-compete terms are described in isolation instead of tested against the company’s practical operating room and the term sheet baseline.
- Sandbagging and indemnification cap provisions are not read together, missing cap-exhaustion risk from known claims.
- Issues are described without severity, quantified scale, document cross-reference, or client consequence.
- The memo identifies problems but stops short of concrete market-standard fixes and next-step actions.

## 3. Legal frameworks / domain conventions that apply
- **Series preferred economics:** Compare SPA terms to the signed term sheet and customary venture financings; departures that shift liquidation preference, dividend accrual, conversion economics, or veto control are investor-favorable and company-adverse.
- **Anti-dilution:** Broad-based weighted average is the market baseline; full ratchet is more dilutive and should be called out with an economic illustration tied to the issuance scenario in the source documents.
- **Consent thresholds:** Consent rights should be tested against operating scale and burn; a low expenditure threshold can create de facto operational control. Measure the threshold against monthly spend or budget authority from the documents.
- **California non-compete:** California Bus. & Prof. Code §§ 16600–16602.5 generally invalidates employee non-competes; analyze any founder or employee restraint under the governing-law and employment-law facts, not the contract label.
- **Pay-to-play:** Distinguish conversion to common from conversion to a shadow preferred class; the latter can preserve economic preference and materially change the penalty for non-participation.
- **Dividend overhang:** Cumulative dividends accrue whether or not declared if the documents so provide; unpaid amounts sit ahead of common in liquidation or can reduce conversion economics, so the review must measure the overhang over likely holding periods.
- **Sandbagging and indemnity cap:** Read any pro-sandbagging language alongside the indemnification cap, baskets, and survival period to determine whether known claims consume cap capacity and narrow recovery for later claims.
- **Protective provisions:** Aggregate veto rights across all investor-held blocking positions; a single holder with multiple vetoes may effectively control major company actions even if no one clause appears extreme alone.

## 4. Analytical scaffolds
- Start with the term sheet baseline, then identify every SPA term that is inconsistent, more onerous, or newly introduced.
- For each issue, state: the provision, the deviation or risk, the controlling market/legal standard, severity, and the recommended fix.
- Close each issue by doing three things: quantify or scale the issue from the source documents; cross-reference the interacting clause, schedule, or ancillary document; and state the downstream consequence for the company.
- For cumulative dividends, calculate accrued overhang across multiple holding periods and show how that reduces common-holder proceeds at representative exit values from the deal record.
- For protective provisions, build an investor-by-investor blocking-right inventory, then count total veto positions held by each investor before assessing cumulative control.
- For sandbagging, identify whether known-claim recovery is preserved, limited, or barred; then test whether such claims erode the indemnity cap and leave less room for other breaches.
- For anti-dilution, show why the clause is market off-center and what dilution effect it has in the financing context described by the documents.
- For any legal proposition, cite the governing authority or standard by name or section when it is available from the documents or general practice.
- For every critical or high-severity item, include a precise market-standard alternative or drafting fix.

## 5. Vertical / structural / temporal relationships
- Track how preferred economics flow from issuance into conversion, liquidation, and exit.
- Track how governance rights accumulate vertically across veto provisions, board rights, observer rights, approval thresholds, and reserved matters.
- Track how liability terms flow temporally from signing through closing, survival, claim notice, and indemnity recovery.
- Track how investor control can expand after closing if a low consent threshold or broad reserved-matter package interacts with budget, hiring, or capex authority.
- If the company’s governance documents, SPA, and term sheet differ, prioritize the document hierarchy and identify where the final paper supersedes earlier economics or controls.

## 6. Output structure conventions
- Write a prioritized issues memo with a clear severity legend at the top using an ordinal scale: Critical, High, Medium, Low.
- Use one row or section per issue, grouped by severity from most to least urgent.
- Each issue entry should follow a conventional legal-memo shape: provision, issue, market/legal standard, severity, consequence, recommended fix.
- Include a cumulative dividend overhang table when cumulative dividends are present, using multiple holding periods and showing the effect on common-holder exit proceeds at representative exit values.
- Include a protective provisions control table that identifies each blocking right, the investor holding it, and the total number of blocking positions held by that investor.
- Include a short comparison against the executed term sheet where relevant, so deviations from negotiated economics or control are easy to spot.
- End with an explicit Recommended Actions block naming the responsible role and a timing anchor tied to signing, closing, or the next revision cycle.
- Keep the memo concise but complete; do not reproduce full contract text, and do not quote internal documents verbatim unless a brief verbatim quote is necessary to identify the disputed language.