Peculiarities of deal structuring in the U.S.: the opinion of a lawyer

When it comes to investment most people refer to the amount of money as key characteristic of the deal. However, it is especially important for start-ups and investors to establish mutual trust and understanding. That is no way possible without proper legal documents and structuring the deal in an efficient way.

There are numerous ways to structure the investment deal un the USA. Some association or groups in order to simplify the process for investors and startups elaborate model legal framework documents which can be used as a guide and base. One of the most popular model documents was elaborated by the NVCA. The NVCA stands for National Venture Capital Association, which is a non-profit trade association that represents the venture capital industry in the United States. The role of the NVCA is to promote and support the venture capital industry in various ways including advocacy, education and networking. The NVCA is representing more than 400 member firms that manage over $600 billion in capital.

NVCA Model Documents are periodically updated to reflect changes in the industry and the legal landscape and provide a framework for venture capital deals and help to streamline the negotiation process between investors and startups. 

In addition, Model Legal Documents also help investors maintain consistency across all their transactions. Through standardization, investors can ensure that all investment deals they enter into are on the same terms. 

Both sides of the deals may adapt Model Documents to their needs and specifics of each transaction. These model documents also include useful notes explaining the meaning of the clauses and suggesting variations on them. In this article, we will discuss some of the different model legal documents offered by the NVCA and their key features.

0. Term Sheet

It is a key document in any investment transaction. Term Sheets are typically non-binding and don’t create any legally enforceable obligations between the parties. Instead, they serve as a starting point for negotiations and help to outline the key terms of a potential deal. This document contains the main terms of the transaction, such as the amount of investment, the amount of the shares that the investor will receive in the company, the conditions for paying dividends, the conditions for protecting the rights of the investor and others. Because they are non-binding, term sheets are highly customizable and can be tailored to meet the specific needs and goals of each party involved. This allows for greater flexibility in negotiations and can help to ensure that both parties are satisfied with the final agreement. In addition, Term Sheets can be used to «test the waters» and check interest in a potential deal before committing to a full-fledged agreement. By outlining the key terms of a potential deal upfront, Term Sheets can help to expedite the deal process and ensure that negotiations proceed smoothly. This can be especially important in fast-moving industries where time is of the essence.

NVCA Model Documents provide deal structure to be be formalized in several documents rather than 1 or 2 (typically sales purchase agreement and shareholders agreement) as in continental system of law. We consider there are certain reasons why it is more convenient to conclude several (below we briefly describe five of them which most commonly used) rather than specify all the conditions in one or two. 

Why is it important:

  • By having separate documents for different aspects of the transaction you greater clarity and specificity. Each document can address a particular issue or aspect of the transaction, and the parties involved can focus on that particular issue without being distracted by other details. 
  • Additionally having multiple documents allows for greater flexibility. If one aspect of the transaction changes, it may only require changes to one document rather than having to change an entire agreement.
  • At last, breaking down the transaction into separate documents can make it easier for parties to understand their obligations and responsibilities. Each agreement can be tailored to the particular party's needs, and they can focus on what is relevant to them. Below are most commonly used:

1. Certificate of Incorporation

Certificate of Incorporation (sometimes called as the Articles of Incorporation) is a legal document that establishes a corporation's existence. It typically includes important information about the corporation, such as its name, address, purpose, number and type of authorized shares of stock. Additionally, it sets forth the corporation's governing structure, including the procedures for holding shareholder meetings, electing directors, and making changes to the corporation's bylaws. Certificate of Incorporation as well outlines some specific corporate procedures, such as the procedure and amount of payout that every shareholder of the company will receive in case of a sale or any other event that involves liquidity or details the conditions and minimum voting requirements for authorizing subsequent financing rounds. Some states require corporations to include specific language in their Certificate of Incorporation, such as a statement that the corporation is organized for a lawful purpose or a provision allowing shareholders to remove directors without cause. The Certificate is the only public document, which means that anyone can access it and view the information contained within (in most states).

2. Stock Purchase Agreement (SPA)

The purpose of the Stock Purchase Agreement is to establish the terms and conditions for the purchase and sale of stock in a company. It is used to transfer ownership of stock and establish the terms and conditions of the sale. This agreement typically includes details about the buyer and seller, the number of shares being sold, the purchase price, the closing date, and any representations and warranties made by both parties. The agreement includes both a number of provisions that are designed to protect the interests of the investors, such as anti-dilution provisions, redemption rights, information rights and provisions that are designed to protect the interests of the company, such as restrictions on the transfer of shares, representations and warranties from the investors, and indemnification provisions. While the Model Document of Stock Purchase Agreement provides a set of standardized terms, it also allows some flexibility to accommodate the specific needs of the investors and the company. For example, registration rights or drag-along rights, if such provisions are negotiated by the parties.

This agreement may also include provisions for any post-closing adjustments, such as a purchase price adjustment based on the company's financial performance after the sale. Some SPAs may also include non-compete and non-solicitation provisions, which prevent the seller from competing with the company or soliciting its customers or employees for a specified period of time. Generally, the terms of a SPA can vary widely depending on the nature of the transaction and the parties involved.

3. Investors' Rights Agreement (IRA)

The Investors’ Rights Agreement establishes the rights and obligations of the parties, including the right to receive information about the company's financial performance and the right to participate in future financing rounds. The model document of IRA covers a wide range of topics, among others, the composition of the company's board of directors, the rights of the investors to receive financial and other information from the company, and the procedures for conducting shareholder meetings. This agreement may also provide for mechanisms to protect the rights of the investor: the right of veto in relation to certain decisions, anti-dilution provisions that allow the investor to keep his share percentage. This agreement is of particular importance in the case of subsequent funding rounds and an increase in the number of investors. Overall, IRA is an important tool for protecting the rights and interests of investors in a company. It helps to ensure that investors have a say in major decisions, receive timely information about the company's financial performance.

4. Voting Agreement (VA)

The purpose of the Voting Agreement is to establish the terms and conditions for the exercise of voting rights by shareholders. This agreement usually defines the conditions and rules for voting at the General Meeting, as well as within the Board of Directors, the quorum for the meeting. The VA may contain provisions that require shareholders to vote in a certain way or that prohibit them from voting in a certain way. This can help to prevent conflicts of interest or ensure that shareholders vote in a coordinated manner. Additionally, the agreement outlines the conditions under which voting rights may be transferred, such as in the event of a merger, acquisition, or other change in control of the company. As a result, the VA can help set the «rules of the game» for all stakeholders.

5. Right of First Refusal and Co-Sale Agreement

The Right of First Refusal (ROFR) is a right that gives an existing shareholder the first opportunity to purchase any shares that another shareholder intends to sell. If a shareholder wants to sell their shares, they must first offer them to the existing shareholders in proportion to their ownership in the company. If the existing shareholders do not want to buy the shares, then the shareholder is free to sell them to a third party.

Co-Sale Agreement: A Co-Sale Agreement allows shareholders to sell their shares together in the event that one of the shareholders receives an offer to sell their shares from a third party. Thus, if one of the shareholders decides to sell his shares, the other shareholders have the right to sell their shares with him at the same price and under the same conditions. This agreement may also contain restrictions on the sale of shares, "lock-up" periods, prohibiting the sale of shares for a certain period of time after the initial public offering. Together, the ROFR and Co-Sale Agreement can provide a framework for shareholders to manage the transfer of shares in the company. By giving existing shareholders the right to purchase shares before they are sold to a third party, the ROFR can help to prevent unwanted shareholders from gaining control of the company. And by allowing shareholders to sell their shares together, the Co-Sale Agreement can help to ensure that all shareholders receive a fair price for their shares and protect minority shareholders from «being left» behind in a sale.

Through five documents, from 1 to 5, it is possible to provide for the main provisions usually specified in investment transactions. Here is the table:

Investment Condition Document Containing the Condition
Number of shares to be purchased by the investor Stock Purchase Agreement
Purchase price per share Stock Purchase Agreement
Payment terms for the investment Stock Purchase Agreement
Voting rights at shareholder meetings Voting Agreement
Corporate Governance Certificate of Incorporation, Investors’ Rights Agreement, Voting Agreement
Investor rights regarding company management Investors’ Rights Agreement
Terms for an investor's exit from the company Investors’ Rights Agreement
Right of first refusal on the sale of shares by other shareholders ROFR and Co-Sale Agreement
Restrictions on the sale of shares ROFR and Co-Sale Agreement
Conditions for the conversion of shares Certificate of Incorporation
Maximum number of shares that can be issued by the company Certificate of Incorporation
Tag Along Right and Drag Along ROFR and Co-Sale Agreement
Anti-Dilution Protection Investors’ Rights Agreement, Certificate of Incorporation
Lock Up Stock Purchase Agreement
Liquidation Preference Investors’ Rights Agreement
Non-solicitation and Non-competition Investors’ Rights Agreement
Preemptive Rights Investors’ Rights Agreement, Certificate of Incorporation,
Confidentiality Stock Purchase Agreement, Investors’ Rights Agreement

So this list is not exhaustive, we have briefly described standard approach which may vary depending on needs of the parties. 

In conclusion, the NVCA Model Legal Documents are a valuable resource for venture capital investors and startups, providing a framework for legal agreements that are commonly used in the industry. 


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