Affirmative Covenants . . .
refer to the contractual provisions in a venture funding that
the company and its management agree to fulfill after the funding is complete.
The covenants typically appear in the financing or stock purchase agreement and
are often accompanied by "negative covenants" which obligate the
company to refrain from taking certain actions after the funding. Common
affirmative covenants include:
Access to records. The company will give the investor
and its representatives reasonable access to company records and personnel.
Financial reports. The company will furnish the investor
with regular financial reports on the status of the company. Balance sheets,
profit and loss statements, and cash flow statements are usually provided
monthly, quarterly, and annually. Audited annual statements are often
required. Sometimes a short "state of the company" statement is
also required from the company president on a monthly basis.
Budgets. The company will prepare annual budgets which
must be approved by the board of directors or, sometimes, by the investor.
Existence and maintenance of property. The company will
preserve its corporate existence and all rights necessary to conducts its
business and own its properties. The company will keep its properties in
Insurance. The company will maintain adequate insurance.
Often, the company also agrees to purchase key man insurance on the lives of
Payment of debts and taxes. The company will pay its
debts and taxes in accordance with normal terms.
Compliance with laws and agreements. The company will
comply with all laws applicable to it and perform its obligations under its
Litigation and other notices. The investor will be
promptly notified of any lawsuit, default under a major agreement, or other
event that could have a material adverse effect on the company or its
Proprietary rights protection. The company will take
reasonable steps to protect its patents, trade secrets and copyrights. These
steps may include securing secrecy or non-competition agreements from
Use of proceeds. The company will use the funds provided
by the investor in the manner described.
Accounting system. The company will maintain its current
Board of directors. Management shareholders will vote
their shares to assure the investor of a representative on the company's
board of directors.
Affirmative covenants can also relate to specific deal points
that are to be performed after the closing of a funding such as management's
undertaking to identify an additional board member or hire a suitable chief
financial officer or other designated officer to round out management. Sometimes
investors require management agreements that engage them as paid consultants to
the company after funding. See:
Agreements, Key Man Insurance,
Covenants, Reps &
Warranties, Take Away