Between July 28, 2020 and September 1, 2020, the National Venture Capital Association (the "NVCA") released updates to its model legal documents for use in venture capital financing transactions. This memorandum will explain the changes to these model forms and some of the reasons for, and implications of, such changes.
As background, the NVCA is an organization based in the U.S. whose members include venture capital firms, investors and professionals involved in investing private capital in early-stage companies. In an effort to promote consistent, transparent investment terms and efficient transaction processes, the NVCA has created model legal documents for venture financing transactions, and these models have been widely used in the U.S.
Questions of Law and Jurisdiction
The model forms are configured for C corporations formed in Delaware, which has been the preferred jurisdiction of incorporation in venture capital, accounting for the vast majority of such companies. This preference is driven in part by the rich database of Delaware judicial precedent, particularly pertaining to corporate and business law matters. Given that venture-backed companies typically view their primary liquidity event as an initial public offering (an "IPO"), the selection of Delaware as the jurisdiction of incorporation also takes into account the benefits and flexibility that Delaware law offers to companies seeking IPOs (and between 80-90% of companies undertaking IPOs in recent years have been C corporations in Delaware). Delaware limited liability corporations ("LLCs") may provide an attractive alternative to companies or investors in certain circumstances, although to date, the NVCA has not published model forms configured for LLCs.
Note that even for companies incorporated in Delaware, certain California corporate laws may apply to the extent such companies are deemed to have significant operations or shareholders located in California. In particular, the California Corporations Code (the "CCC") may cause tension with, or contradict, the requirements of the Delaware General Corporation Law (the "DGCL"). This memorandum seeks merely to point out this potential challenge for "quasi-California" companies and does not offer a comprehensive analysis on the considerations. "Quasi-California" companies and their investors should take special care to understand how provisions of the CCC and DGCL may operate together and how such differences need to be addressed in the documentation to ensure that the provisions of the financing documents operate as intended by the parties.
Overview of the NVCA Model Forms
The NVCA periodically updates its model form documents, with the most recent update (prior to the latest changes in 2020) occurring in early 2018. The NVCA's updates to the model forms attempt to:
- track developments in applicable law;
- reflect market practice at a particular time with drafting options to facilitate negotiations and allow parties to efficiently achieve a closing of a transaction; and
- reflect "best practices" in the industry (establishing, or established by, industry norms).
The suite of NVCA documents that have been updated since July 28, 2020 includes annotated models of the following:
- Term sheet;
- Certificate of Incorporation ("COI");
- Share Purchase Agreement ("SPA");
- Investors' Rights Agreement ("IRA");
- Voting Agreement ("VA");
- Right of First Refusal and Co-Sale Agreement ("ROFRCA");
- Management Rights Letter;
- Indemnification Agreement; and
- Limited Partnership Agreement insert ("LPA Insert").
This memorandum will focus on the changes to the core financing documents themselves, including the SPA, IRA, VA and ROFRCA, as well as the COI and proposed LPA Insert.
The model forms' drafting options serve as a helpful basis to start negotiations, but they should be tailored to meet deal-specific requirements. Increasing care should be given as time elapses following the NVCA's last update to the model forms, as applicable law, regulation and market practice continue to develop.
Please click here to continue reading the full article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.