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The Most Important Element of Your Venture Fundraising Documents?

Although hidden away among other weighty fund-raising documents, the Schedule of Exceptions can be your best friend.There is the Stock Purchase Agreement, the Investor Right Agreement, the Right of First Refusal and Co-sale Agreement, and the Voting Agreement. There may be others, but these form the backbone of most venture (and some non-venture) fundraising processes and can run into the hundreds of pages in total. As fun as that sounds, the one thing you want to make sure you don't fall asleep on is the Schedule of Exceptions!

The Schedule of Exceptions is your get-out-of-jail-free card. It basically says, "well, we tell you all of these things about our company in the Representations and Warranties section of the Purchase Agreement, but here are the exceptions to those things we just told you about, and once I tell you, you can't say you didn't know". The Reps and Warranties are your way of telling your investors that you ran your business like a sane, law-abiding entity. It says that, "all of our employees have signed NDAs and have assigned all IP to the company", "all of our customer deals were consummated with a binding legal agreement", "we're not shipping bricks", etc.

But the fact is, especially for young companies, sometimes things get missed. Documents at all companies go through a lifespan. They often start out raw and develop over time as they get more scrutiny and exercise. Maybe your early employees did not execute an assignment document. Perhaps some of your early consultants did not sign an NDA. Maybe you were late on some sales tax remittance payments for last year. These things happen. But noone likes surprises. I find that is especially true of investors.

The Schedule of Exceptions is your opportunity to put it all on the table. For every Rep you make, think very hard about whether there have been any exceptions and put them out there. If there are "scary" exceptions you will want to address them directly with your investors before they see it on the Schedule of Exceptions, to walk them through why it is or isn't okay and what you are doing about it. Don't just put your bad news in the document and leave it for them to discover. Many exceptions are fixable (get the consultant to sign an NDA, get your employees to sign invention assignment agmts, etc.) and that is often why due diligence is such a mad rush. It's like spring cleaning - now is the time to make it right.

So don't forget about the schedule of exceptions to your Reps and Warranties. It is where you can save yourself from making material mis-statements to investors and having significant legal and operating issues down the line. It may save your bacon with investors.