Open Source Venture Financing Documents
A few weeks back, I wrote a blog post (on Bridge Loans versus Preferred
Equity) that briefly
mentioned the National Venture Capital Association’s Model Legal Documents for
a Venture Capital financing. I am a heavy user of these documents (having
found them to be tremendously valuable in our negotiation process) and thought it would be worth going into some greater detail here.
These documents were drafted to offer a "template" set of public domain model legal documents that are "fair [and] avoid bias toward the VC or the company/entrepreneur" and reflect "current practices and customs". By providing these documents, the NVCA has made my job much easier. I routinely use the NVCA docs as the baseline for First Round Capital's term sheets. Doing so allows me to (1) clearly communicate to entrepreneurs that I am not looking for any non-standard terms, (2) reduce the legal fees of both parties, and (3) get a deal closed much faster than I would if I had to start from scratch. The documents also note where the East coast and West coast differ in their standard terms - a feature which has been useful as I invest bi-coastally.
A little more about the documents:
The documents were drafted by a working group of law firms and venture firms and are updated annually. You can check out the current members of the working group here.
The documents include a model Term Sheet, Stock Purchase Agreement, Certificate of Incorporation, Investor Rights Agreement, Voting Agreement, Right of First Refusal and Co-Sale Agreement, Management Rights Letter, and Model Indemnification Agreement.
An interesting comment from the NVCA site:
"Annually, our industry closes several thousand financing rounds, each consuming considerable time and effort on the part of investors, management teams and attorneys. A conservative estimate is that our industry spends some $200 million in direct legal fees annually to close private financing rounds. In an all-too-typical situation, the attorneys start with documents from a recent financing, iterate back and forth to get the documents to conform to their joint perspective on appropriate language (reflecting the specifics of the deal and general industry best practices), and all parties review numerous black-lined revisions, hoping to avoid missing important issues as the documents slowly progress to their final form. In other words, our industry on a daily basis goes through an expensive and inefficient process of "re-inventing the flat tire." By providing an industry-embraced set of model documents which can be used as a starting point in venture capital financings, it is our hope that the time and cost of financings will be greatly reduced and that all principals will be freed from the time consuming process of reviewing hundreds of pages of unfamiliar documents and instead will be able to focus on the high level issues and trade-offs of the deal at hand."