More terms for venture capital term sheets

11 Dec More terms for venture capital term sheets

In the article “Capital-Raising Term Sheets for Angels and Venture Capitalists,” I mentioned that an American Bar Association Venture Capital and Private Equity subcommittee that I am serving on was in the process of preparing comments to the National Venture Capital Association form Term Sheet. The NVCA advocates the use of certain model documents, including a Term Sheet, in venture capital transactions.
Recently, the subcommittee’s comments were published. A copy of that product, which I’ll call the “ABA Comments,” can be downloaded here. Reading the ABA Comments would be helpful for anyone involved with or affected by a venture capital financing.
NVCA term sheet
The NVCA is a trade association that represents United States venture capital firms. Several years ago, the NVCA tackled the ambitious goal of developing a set of model documents that can be used in venture capital transactions. Among other purposes, the model documents were designed to do the following:
• Reduce transaction costs.
• Reduce time to closing.
• Reflect industry norms.
• Promote consistency among transactions.
• Establish certain industry standards.
• Provide basic explanations as to the reason for particular provisions or the context in which certain provisions should be included.
By most accounts, the NVCA was successful in developing these model documents and meeting their goals. They are used in many venture capital financings today, and variations of them are sometimes seen in angel investor financings. These documents are updated periodically to reflect refinements of concepts, changes in case law, and evolving industry trends.
ABA’s response
Many of those who serve with me on the Venture Capital and Private Equity subcommittee believe that the NVCA forms are very good documents from which to negotiate venture capital transactions. However, they do have their shortcomings. To address these shortcomings, many in the subcommittee wanted to do the following:
• Generate more options and alternative provisions, including many that are more “company-friendly.”
• Provide more detailed explanations concerning key provisions and negotiating points.
• Elaborate on current case law and the implications of various provisions.
• Identify which of the alternative provisions are more frequently used.
• Educate those with little or modest experience with venture capital transactions.
Instead of creating another set of forms, the subcommittee concluded that a more useful approach was to provide annotations, commentary, and supplemental and alternative provisions to the existing NVCA model documents. The first form that the subcommittee examined was the NVCA Term Sheet. We will likely be looking at one or more of the other NVCA forms in the up-coming year.
Use of form
The ABA Comments (and the NVCA form itself) provide not only a good starting point from which to structure a venture capital transaction, they also provide considerable background information as to the intricacies of structuring a venture capital deal. The ABA Comments contain good discussions concerning liquidation preferences, anti-dilution, pay-to-play, registration rights, investor-appointed directors, and similar topics.
Unless you regularly are involved in venture capital transactions and stay up to date on recent trends and deal structures, the ABA Comments are an important read for anyone that either intends to receive venture capital financing or is planning on providing it.
Previous articles by Matt Storms
• New rules would expand the definition of “accredited investors”
• In pursuit of capital, be sure to track your private offering
• When raising capital, why use a Private Placement Memorandum?
• Capital-raising term sheets for angels and venture capitalists
• Translating the language of capital-raising
• Securities compliance is part of raising capital
• Raising capital through placement agents
• Due diligence and corporate clean-up
• The mechanics of raising capital for your business
• Sarbanes-Oxley for the Rest of Us