NVCA Updates Its Series A Model Legal Documents

Guest post by  Dror Futter, Partner, Rimon Law, PC

The National Venture Capital Association (NVCA) has posted an update to its model legal documents for Series A financings. The model agreements were first created in the early 2000s under the auspices of the NVCA by a group of venture fund general counsels and attorneys from leading firms in the venture space. Since then, a group with a similar composition meets periodically to update the forms.

The model forms were created in an effort to introduce efficiency and some measure of standardization to the process of documenting early-stage venture funding rounds. The NVCA forms were widely accepted, although most law firms modified them somewhat in creating their standard. Although the form documents can be subject to the laws of any state, they are optimized for Delaware law (the forms do provide some California specific guidance as well). There are those who believe that the form agreements favor either investors or entrepreneurs. As a participant in the drafting group, I have witnessed a consistent effort to be balanced.

Provisions of the form agreements generally fall into one of three categories:

  • Consensus provisions broadly accepted
  • Multiple “market” alternatives – when several alternatives on a given point are common in the market, the forms generally present them
    as alternatives within the main body of the text
  • Minority alternatives – where the market has established a clear choice on a given provision but there is a less common alternative, the
    forms will often include a footnote which references the “minority” alternative

Modifications to the forms as a result of periodic review also generally fall into one of three categories:

  • Corrections/Clarifications
  • Changes resulting from changes in market norms
  • Changes resulting from legal developments, usually changes in Delaware law

The following is a summary of the most significant changes in the model documents made in the current round of revisions.

Series A Preferred Stock Purchase Agreement

  • Life Sciences Provisions – Historically the model documents were more in line with IT investments. In this update, the agreements have alternative clauses that are more commonly found in life sciences investments. The first of these alternatives is in Section 1.3(b) which provides alternative language for milestone-based financing (which is more common in life sciences investments). Other relevant changes appear in multiple places in the Stock Purchase Agreement.
  • IP Representations (Section 2.8) – The IP representation has been enhanced with the addition of representations with respect to prior activities of employees and consultants, as well as activities funded by governmental and academic institutions.
  • Privacy Representation (Section 2.29) – Enhanced with the addition of a representation with respect to HIPAA compliance.
  • New Optional Representations – The updated agreement provides the text for optional representations with respect to Export Control Laws (Section 2.30), Preclinical Development and Clinical Trials (Section 2.31), FDA Approvals (Section 2.32) and FDA Regulation (Section 2.33).
  • Arbitration Under the Delaware Rapid Arbitration ACT (DRAA) (Section 6.16) – As an alternative to AAA arbitration, the model agreement provides a detailed provision for arbitration under the relatively newly enacted DRAA. The DRAA provides, among other things, for an arbitration timetable that ensures a relatively quick decision in most instances.

Amended and Restated Certificate of Incorporation

  • Initial Coin Offerings (ICO) – In Section 3.3.5, the model Certificate adds ICOs to the list of protective provisions for Series A shareholders. This addresses a gap in prior versions that did not contemplate the rise of ICOs. When venture-backed companies undertake ICOs, it raises a host of other questions which I addressed in this article
  • Interest – In new Section 6.4, a Corporation is obligated to pay interest on an outstanding redemption payment. This provision is a response to a Delaware decision, TCV VI L.P. v. TradingScreen, C.A. No. 10164-VCN (Del. Ch. Mar. 27, 2015), which provided that a Board’s decision of how much of the company’s funds should be used to pay a mandatory redemption obligation is subject to the business judgement rule.
  • Series A Director Protective Provisions (Article Sixth) – This provision provides that the matters listed in the Investors’ Rights Agreement that require the approval of the Series A Shareholders designee on the Board cannot be approved without the approval of such director. With this requirement in the Certificate, any Board action in violation of this requirement is invalid. An action taken in violation of the Investors’ Rights Agreement is still valid, but subjects the company to a breach of contract claim.
  • Indemnification of Officers and Directors (Article Eleventh) – Newly added language to this provision specifies that any modification of this section can only be prospective in effect.

Investors’ Rights Agreement

  • Harassment Policy – In Section 5.11 an optional new clause has been added that obligates the company to put in place an anti-harassment and anti-discrimination policy.
  • Consent to Electronic Notice – In Section 6.5(b) parties consent to electronic notice pursuant to Section 232 of the Delaware General Corporation Law.
  • This model agreement also adds the option of arbitration under the DRAA (Section 6.11).
  • The model agreement deletes former Section 6.13 “Acknowledgement” in which the company acknowledged that investors review many opportunities and acknowledging that investors might invest in competing entities.

Voting Agreement

  • Conditions on Drag Along – In the updated form, shareholders are not subject to the drag along obligation if (i) they are required to enter into a non-compete or non-solicitation provision; or (ii) the shareholders are required to terminate other, non-financing related agreements with the company (Section 3.3(b) and (c)). The model form also deleted a provision that required as a condition of the drag along that investors’ liability in connection with the sale be several and limited to sale proceeds.
  • Bad Actor Covenants – The new form has expanded requirements to verify that investors are not Bad Actors under Rule 506(d).
  • Consent to Electronic Notice – In Section 7.7(b) parties consent to electronic notice pursuant to Section 232 of the Delaware General Corporation Law.
  • This model agreement also adds the option of arbitration under the DRAA (Section 7.16).

Right of First Refusal and Co-Sale Agreement

  • Consent to Electronic Notice – In Section 6.5(b) parties consent to electronic notice pursuant to Section 232 of the Delaware General Corporation Law.
  • This model agreement also adds the option of arbitration under the DRAA (Section 6.4).

Using the Model Forms

The model forms are very helpful to practitioners in the venture space. Although not modified in the most recent round, the model documents also include a model term sheet that captures the critical business terms of a Series A financing. It is not uncommon for a term sheet to refer to the documenting of the definitive transaction using the NVCA model forms.

I recall being in a negotiation on behalf of a start-up and investor’s counsel informing me that my proposed language did not conform to the NVCA documents. By coincidence, the drafting group had just reviewed that clause the previous month and I was able to point the attorney to a footnote suggesting alternatives. By definition, form documents are designed to address “standard” financings. Inevitably, many financings will present one or more “non-standard” issues. In those scenarios, custom solutions are required and arguing that a position is “not in the NVCA forms” may not be a compelling argument.

For more information, you can contact Dror Futter:

Dror Futter,  Partner, dror.futter@rimonlaw.com

(201) 685-0007

Dror Futter focuses his practice on startup companies and their investors, and has worked with a wide range of technology companies. His fifteen years’ experience as in-house counsel includes positions with Vidyo, Inc., a venture-backed videoconferencing company, and New Venture Partners, a venture fund focused on corporate spinouts. Prior to that, Mr. Futter was Counsel to the CIO of Lucent Technologies, as well as supporting parts of its sourcing organization. Mr. Futter’s practice has four main focus areas: Venture Finance/Corporate, Blockchain and Cryptocurrencies, Transactional IT & IP, and External General Counsel.



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