The National Venture Capital Association (“NVCA”) has created and maintained a standardized, industry-embraced set of model documents that can be used as a starting point in venture capital (“VC”) financings. These model documents are intended to reduce the time and cost of financings and to free principals from the time consuming process of document review, allowing them to instead focus on the high level issues and trade-offs of the deal at hand.
This post is the first of a three-part series looking at the current NVCA Series A model legal documents.
The NVCA has provided the following model documents, among others, all of which can be found here:
- Series A Preferred Stock Purchase Agreement;
- Right of First Refusal and Co-Sale Agreement;
- Investors’ Rights Agreement;
- Voting Agreement; and
- Certificate of Incorporation.
Due to the changing dynamics of the industry, state law an other considerations to improve the model documents from their previous updated in 2014, the NVCA General Counsel Advisory Board (the “Advisory Board”) was recently created to update the model legal documents and to provide guidance to the NVCA on policy matters impacting VC and VC-backed companies. Several of the Advisory Board’s significant changes to the aforementioned documents are detailed below.
Changes to the model Series A Preferred Stock Purchase Agreement (“SPA”)
- Life Sciences Provisions. The model documents are historically in alignment with information technology investments. However, the revised model SPA contains alternate clauses that are more commonly found in life sciences investments. For example, the revised model SPA now contains alternative language for milestone-based financing (Section 1.3(b)) and use of proceeds (Section 1.4) which are more common in life sciences investments. These alternative clauses were included out of recognition that some business terms and other considerations in life science investments are unique in certain respects from other VC investments.
- Multiple Closings. The footnotes of the revised model SPA provide much more detail to the layout and mechanics for a milestone closing, as outlined below.
- The Advisory Board added an optional mechanic penalizing a purchaser upon its failure to purchase additional shares at a milestone closing by forcing a conversion of such defaulting purchaser’s preferred shares into common shares at a lower rate than the conversion rate provided in the certificate of incorporation.
- To avoid purchasers voluntarily electing to convert preferred shares prior to a default, the Advisory Board provides an optional covenant whereby the purchasers agree they will not elect to convert preferred shares into common shares before a milestone closing.
- Additional language allows non-defaulting purchasers to purchase the excess shares under a milestone closing from defaulting purchasers. This protects both the company and the investors alike, as the company still obtains the funding upon achievement of a milestone event, and investors are assured that the company has the money it needs to keep their personal investment valuable.
- Intellectual Property (“IP”) Representations. The IP representation (Section 2.8) underwent several revisions, including:
- the addition of Footnote 14, which expands the definition of “Company Intellectual Property” to include language specific to life science investments;
- expansion of the representation that the company owns the rights to IP without infringing on the rights of others to include prior activities of employees or consultants;
- greater detail with respect to what IP rights employees or consultants have assigned to the company; and
- inclusion of a new representation that no government or educational or research institution funding was used to develop company IP, and further, that no person who has developed company IP has performed services for the government or an educational or research institution;
The end result of these revised IP representations is that VC investors now have enhanced clarity regarding what they are buying and what they are willing to pay for it. Additionally, the revised IP representations relate directly to the business foundations of a VC deal because if other entities and institutions can lay claim to the IP of an investment target, a VC investor will now have greater leverage in the negotiations and further protections down the road if an undisclosed third party asserts ownership of a company’s IP.
- Data Privacy. The data privacy representation (Section 2.29) was revised to include a representation confirming compliance with applicable requirements of the Health Insurance Portability and Accountability Act of 1996.
- Additional Optional Representations. The revised SPA also includes the following optional representations:
- 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. The dispute resolution provision (Section 6.16) now includes the Delaware Rapid Arbitration Act as an optional alternative to arbitration with the American Arbitration Association. The DRAA provides, among other things, for an arbitration timetable that typically ensures an expedited decision.