Ecvc Identify Spa Issues Scenario 01

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.