Creating Deal Efficiency — Leveraging Model Forms

In working with numerous start-ups and early-stage entrepreneurial firms, one of the primary questions we get at Moonshots Capital is how to quickly and efficiently get from deciding to undertake Series Seed or Series A funding to the point of actually funding and closing the transaction. Firms at this stage do not have armies of lawyers, accountants, and finance professionals to manage transactions, and the less time, energy, and expense that can be spent on the funding process itself, the better. In response to that question, we recommend our portfolio companies have counsel start with, and utilize, the model form transaction documents published either by SeriesSeed.com, for early-stage Series Seed rounds, or by the National Venture Capital Association (“NVCA”) for later-stage Series Seed rounds or Series A rounds. These forms are widely used in private equity and early-stage venture financing rounds, and are easily recognizable to the entrepreneur, company players, counsel, and finance professionals.

Adopting these forms in early rounds for your investor documents also facilitates subsequent rounds of investment. The forms are designed to be superseded (when moving from the SeriesSeed.com forms to the NVCA forms) or easily amended and restated (once on the NVCA forms) in subsequent rounds while maintaining some level of continuity and predictability between each round of investment. As a result, the issuing company is positioning itself well for future financings by building on a base of documents that easily translates into the next round of investment. This operates to the benefit of both company and investors by facilitating further capital infusions when needed, providing continuity for rights of the existing investors, and eliminating any potential unique or special terms that can become potential roadblocks in future financings.

It is also very helpful in promoting deal efficiency. Given that the basic forms and formats are published and familiar to the financial and legal community, with language that has been vetted and deemed acceptable by a wide range of professionals, the review, editing, and negotiation process is streamlined. The last thing an investor’s legal or financial advisor wants to do is dedicate precious time to trying to parse through unrecognizable proprietary forms advanced by an issuing company, and determine (or even worse, have to negotiate) how far the company or its counsel has strayed from generally accepted market terms. Document sets that have that problem will likely take a back-burner and may impact the ability to bring more co-investors into a transaction. As a result, using proprietary forms will only have the effect of delaying the company’s time to closing and potentially reduce your ability to quickly fill the round.

In the words of the NVCA, their model documents aim to:

• Reflect, and in a number of instances, guide and establish industry norms
• Be fair, avoid bias toward the VC or the company/entrepreneur
• Present a range of potential options, reflecting a variety of financing terms
• Include explanatory commentary where necessary or helpful
• Anticipate and eliminate traps for the unwary (e.g., unenforceable or unworkable provisions)
• Provide a comprehensive set of internally consistent financing documents
• Promote consistency among transactions
• Reduce transaction costs and time

After having used the NVCA forms in a large number of Moonshots Capital investment transactions, they generally accomplish these purposes and their availability has gone a long way in streamlining what was once an expensive and inefficient process.

This is not to say, however, that the company and its investors are freed from choices to be made and trade-offs to manage in using the model SeriesSeed.com or NVCA model forms, especially the latter. The forms accommodate a variety of alternative terms and approaches such as allowing for participating vs. non-participating preferred, cumulative dividends vs. non-cumulative dividends, full-ratchet vs. broad-based weighted average anti-dilution provisions, as well as language for pay-to-play provisions and redemption rights. These are all choices that the issuer, and the lead investor (or investors), can and need to make when putting together the basic offering terms based on the particular circumstances of the offering. Once the choices are made, however, the basic form language and format that flows from those choices (many negotiated as part of the term sheet) are fairly well defined.

There are some elective provisions, however, that we would typically advise issuing companies to include from the beginning just to reduce the number of iterations you’ll have to suffer when dealing with investment funds or venture capital investors. The forms include provisions unique to these types of investors, such as provisions allowing degrees of freedom for directors appointed by these firms when dealing with certain opportunities, provisions designed to protect these investors from being restricted in their investment activities, and provisions in the form indemnification agreements allowing for indemnification of appointing stockholders as well as the directors they appoint to serve with portfolio companies. These provisions should be included in the drafting process from the start of the process, simply because they will come back from investors as comments anyway and there’s no real reason to waste cycles when the point is to get to closing.

In effect, one of the best things an entrepreneur can do to streamline the funding process and promote predictability and deal efficiency is to start the process based on generally accepted industry forms and formats and try and take a balanced approach in the choices to be made within the structure of those basic forms. That, as much as anything, will get your company to closing faster, reduce your overall transaction expenses, and position you well for future financings.

This article was written by Moonshots Capital’s General Counsel, Peter Deliso.

Peter Deliso serves as General Counsel to Moonshots Capital and its related investment funds. He is also a partner with Executive Counsel, PLC, a firm he joined in 2008 specializing in outsourced General Counsel services for start-up, early-stage, and mid-sized technology-based firms as well as private equity and venture capital firms that invest in those companies.