Model Venture Capital Documents: Everything You Need to Know
The Model Venture Capital Documents reflect—and in a number of occasions, establish and guide—industry norms.3 min read
2. Aims of Model Venture Capital Documents
3. Highlights of the Updates Made to the VC Documents
4. Series Seed Document vs. Series a Document
Updated November 19, 2020:
The Model Venture Capital Documents reflect—and in a number of occasions, establish and guide—industry norms.
Model Venture Capital Documents
Thousands of financing rounds are closed each year in the venture capitalist industry. Each round consumes a significant amount of effort and time on the part of managers, investors, and attorneys. The industry spends about $200 million each year on legal fees to close all of the financing rounds.
The attorneys working for the two parties will usually review the documents numerous times in order to get them to a point where they mold into their final form. In some sense, the venture capitalist industry is a terribly inefficient and expensive process that seems to be "re-inventing the flat tire" on a regular basis.
The National Venture Capital Association (NVCA) would like to decrease the cost of the financing process by implementing industry-based model documents. These documents would help standardize the process and prevent lawyers from spending their time getting familiar with unfamiliar documents. Instead, lawyers should be spending their time adding value to the process by focusing on higher level issues and negotiations.
The NVCA sees huge disparities between how the East and West Coast differ in their documentation processes. The NVCA sees a great opportunity to streamline these processes in order to present best practices to the industry as a whole. The most significant benefits of these new processes would be that the overall cost of lawyers should significantly decrease and the risk of stumbling into a legal trap should subdue.
The NVCA unveiled updates to its documentation process on February 7, 2018. The documents are available free of charge as a public resource. The goal of the NVCA is to:
- Promote a starting point for the model legal document process
- Provide an extensive and consistent set of financing documents
- Reduce the time and cost associated with the current document process
The five documents that were updated include the:
- Certificate of Incorporation
- Voting Agreement
- Investor Rights
- Stock Purchase Agreement
- Right of First Refusal
Additionally, the NVCA added the Confidential Disclosure Agreement document. Many venture capital investors in the information technology industry try to avoid these documents. On the other hand, many venture investors in the life science sector will authorize these agreements in anticipation of reviewing confidential and proprietary information.
Aims of Model Venture Capital Documents
The objective of the Model Venture Capital Documents include:
- Establish, guide, and reflect industry norms
- Create a fair playing field for all participants
- Provide a variety of financing term options
- Introduce supplementary commentary
- Eliminate and anticipate traps for the inexperienced
- Provide and create a thorough set of consistent financing documents
- Encourage consistency with transactions
- Decrease the cost and time of transactions
Highlights of the Updates Made to the VC Documents
The highlights of the updates to the venture capital documents include:
- Drafting options are now incorporated into the life science transactions
- A protective blocking right has been attached to the model
- The Certificate of Incorporation document gives investors veto authority over offerings involving blockchain technology
- A code of conduct and anti-harassment stipulation has been attached to the model Investor Rights Agreement document
- A new set of drafting options allows participants to modify the dispute resolution provisions, allowing them to take advantage of the Delaware Rapid Arbitration Act
- They now ensure that drags can effectively be implemented in the hope of reducing a minority shareholder claim
Series Seed Document vs. Series a Document
The Series Seed Documents are a standardized set of documents that can be easily and quickly arranged for a seed investment. In other words, these documents help to get a company financed quickly, legally, properly, and intelligently. The Series Seed documents are appropriate to use when an investor:
- Is looking to purchase equity instead of convertible debt
- Is impartial to the overall terms but needs to retain certain levels of ownership, liquidation preferences, and the rights of first offers in future financing opportunities
- Is investing at a low valuation or small amount
The Series Seed documents seem to be the most appropriate when used among family and friends for equity seed financing, instead of with a professional investor.
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