NVCA is pleased to announce that our legal doc templates were recently reviewed and updated to incorporate feedback and the ever-changing legal environment. The  revisions contain some important and useful new provisions, a number of which come in response to recent Delaware Chancery Court decisions of importance to venture capitalists.

Thank you to all the general counsels (both within VC firms and outside counsels) who volunteered their time to review these docs and incorporate the changes. On behalf of NVCA, we greatly appreciate your time and effort!

Spearheaded by Sarah Reed of Charles River Ventures in 2003, these model docs are widely used and have been adopted by many of the law firms that are active in the venture capital ecosystem.  In fact, since they were posted the model docs webpage has been the most visited page on the NVCA website. Sarah received the NVCA Outstanding Service Award in 2007 for her work to launch this project.

Having an agreed upon starting point for legal docs necessary to complete venture capital transactions saves venture capitalists and entrepreneurs both time and money. These model docs establish an even playing field allowing venture capitalists and entrepreneurs to come together and focus their negotiations on the uniqueness of each particular deal.

We encourage you to download the updated versions of the templates.

Key Highlights:

MODEL CHARTER

• Added language to the protective provisions in response to Fletcher Int’l, Ltd. v. ION Geophysical Corp., Case No. C.A. 5109-VCP (Del. Ch. Ct. 5/ 28/10), stating that, if any of the listed items (which require Preferred consent) are entered into without the requisite consent of the Preferred, they shall be null and void ab initio, and of no force or effect.  In the Fletcher case, defendant company had issued a promissory Note without seeking the Preferred consent required under the charter protective provisions.  Rather than simply declaring the issuance void and ordering the transaction to be rescinded, the court applied an injunction standard and concluded that, although the Preferred holder had proven the likelihood that its consent right had been contravened, compensatory damages were calculable (or another equitable remedy might be available), and, in balancing the potential harms to the parties, held that the corporation would suffer the greater harm were it forced to return the borrowed funds.
  
  
• Revised the language in the redemption section in response to SV Investment Partners, LLC v. Thoughtworks, Inc., Case No. C.A. 2724  (Del. Ch. Ct. 11/10/10), in which the Chancery Court construed the words “funds legally available” in a manner unhelpful to investors.  The Court described a number of “additional protections” that the investors could have included to give their redemption rights more teeth, and (citing the NVCA Model Legal documents!) stated that “sophisticated investors understand that mandatory redemption rights provide limited protection and function imperfectly, particularly when a corporation is struggling financially.”  (The Thoughtworks case is currently on appeal.) 

MODEL INVESTOR RIGHTS AGREEMENT:

• added a portfolio company obligation to have any Insider Trading Policy permit so-called 10b5-1 trading plans
• Added a provision in the preemptive rights section that allows an investor to apportion its rights not just among Affiliates, but also among its LPs
• Added new (optional) provision to cause company to reimburse separate investor counsel in event of a sale of the company

RIGHT OF FIRST REFUSAL/CO-SALE AGREEMENT

• Added provision that permits investors to receive their liquidation preference, in the event the majority stockholder(s) sell directly to a third party.