Venture capital legal documents aren't necessarily consistent from one instance to another. However, when it comes to the industry, it's becoming more standard to use various documents.

Different Documents in Venture Capital

Venture capital is still a relatively young industry. However, it's still a legitimate one that's enjoying more standards and patterns. One area that's trending toward consistency is documentation.

In the past, a venture fund's counsel and a startup company's lawyer may have negotiated terms. Groups associated with the venture capital industry have attempted to create standardized documents.


Stock purchase agreement

This agreement includes the purchase terms and sale of the stock to the investors. This stock purchase agreement is similar to one in an M&A context since it usually contains the following:

  • Purchase price
  • Warranties and representations from investors and the company
  • Conditions to closing

The agreement outlines the terms and conditions upon which an individual buys company shares.

Voting agreement

The shareholders come to a voting agreement. Usually, it has provisions that relate to a company's control and management. It covers how the board is chosen as well as regulations over the size of the board.

Right of first refusal/co-sale agreement

The founders and possibly some or all of the current shareholders agree on a right of first refusal. This states that founders and shareholders (where applicable) will not sell their shares without giving investors, and sometimes the company, the right to purchase those shares.

Investors' rights agreement

There may be a wide range of provisions in an investors' rights agreement, such as information rights. These rights outline how to share certain information about the company with the shareholders. Information may be financial, and it might only be shared with shareholders who own a certain threshold of shares, such as 10 percent or more.

The provisions may be used to determine corresponding provisions for subsequent funding rounds. Shareholders' rights are also detailed in this agreement, particularly with respect to minority investors and the rights they hold.

In general, the agreement may set out the following:

  • Requirements for reporting and financial disclosures
  • Observer rights
  • Procedures for inspecting the company or indicating concerns

Subscription agreement

A subscription agreement often has details of the investment round, such as the following:

  • Payment terms
  • Number and class of shares
  • Warranties and representations about a company's condition
  • Milestones

Warranties and representations are qualified in a disclosure letter. Also, supporting documents explicitly set out any issues that the founders believe to be important to investors before the investment is completed.

Other Documents

Certificate of Incorporation

Along with the basic information included in a Certificate of Incorporation, such as a company's name and the classes of stock it can issue, the Certificate usually includes a description of this stock as well. The description often addresses the following pertaining to a company's class and series of stock:

  • Rights
  • Privileges
  • Preferences
  • Restrictions

Term sheet

Term sheets outline a proposed investment's key financial terms along with other terms. Terms may include the following:

  • The size of an investment
  • The financial instruments that will be used
  • The valuation placed on a company

Parties must come to an agreement. Once that happens, drafting investment documents is based on the term sheet. In most cases, a term sheet's provisions aren't legally binding, except for clauses relating to exclusivity, costs, and confidentiality.

The terms of an investment are often conditional upon successfully completing due diligence about financial, commercial, and technical aspects.

A term sheet states terms under which someone agrees to invest, including the following considerations:

  • Corporate governance
  • Financial structure
  • Liquidation

Articles of Association

The Articles include the following:

  • The rights associated with various share classes
  • The procedures for issuing and transferring shares
  • Procedures for holding board and shareholder meetings

The Articles of Association may contain some of the same protective provisions found in the shareholders agreement, and they may be repeated here.

Various groups in the venture capital industry are working toward standard legal documents across the field. This can be very helpful for investors and the companies they invest in. Having a standardized system can keep everyone on the same page regarding rights and agreements, which can make this relatively young industry a stronger one.

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