Model Financing Documents and Term Data

September 21st, 2006

The National Venture Capital Association maintains a set of “standard” transaction documents for venture financing. The documents are interesting, perhaps especially for businesses that aren’t familiar with the process and don’t know what to expect for transaction terms.

At the same time, the limitations of presenting a single set of documents as “standard” become quickly apparent on review. There are multiple alternatives offered for most of the key terms with no indication of what circumstances lead parties to settle on one or another set. East Coast/West Coast differences within the investing community lead to further alternative sets of terms.

It is useful to see a range of sample terms, but what is even more interesting is to see how often these terms get used. VentureOne’s Deal Terms Report collects this data. I haven’t seen the report, but it would be fascinating to compare its data to the NVCA terms and see, for example, the average number of investors joining the Board of Directors in a Series A financing, or the percentage of financings where founders gave personal reps & warranties.

The other interesting thing to note is that the California State Bar Association’s Corporations Committee has published a set of adaptations to the NVCA forms. The forms are published in pdf, which makes them hard to compare easily with the NVCA’s Word documents, but the adaptations generally reflect (i) wrinkles in California law that may bear on transaction terms, and (ii) a feeling (typifed by Wilson Sonsini’s letter to the Committee) that the documents skew toward investor-friendly provisions.

The WSGR letter points out that most law firms have their own sets of form documents and asks whether another set of forms is beneficial. I agree that law firms and investors certainly have access to plenty of forms (such as the set I have generally worked from), but most entrepreneurs aren’t interested in paying money for a set of professional-reference tools. Good work to the NVCA for making its forms publicly available, and to the Corporations Committee for providing its comments and adaptations. Transparency and public discussion are good for business.

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