Understanding the Key Updates in the NVCA's Model Legal Documents

Ariana Shaffer

In October 2023, the National Venture Capital Association (NVCA) introduced significant updates to its model legal documents, impacting the landscape of venture capital investments. While some changes aimed to streamline language and provide additional context through footnotes, there are noteworthy updates that directly affect investors. Below is a summary of the key modifications in the NVCA's updated model legal documents:

Investors' Rights Agreement (IRA):

1. Direct Listing: Investors now have more flexibility in pursuing a "Direct Listing" as the updated model IRA incorporates it into the S-1 demand section.

2. Annual Financial Statements: The default remains unaudited annual financial statements, but the delivery period has been extended to 180 days. The model IRA acknowledges that a shorter timeframe may be desired for unaudited financial statements.

3. Waiver of Statutory Information Rights: Language has been added to clarify that investors can still request information related to their holdings once per quarter, even if they waive statutory information rights.

4. Expenses of Counsel in connection with an IPO: An optional section has been added requiring the company to reimburse expenses associated with separate legal counsel obtained by investors to protect their interests during an IPO, addressing potential misalignments with management during such transactions.

5. Diversity Covenant: An optional covenant has been added to require the company to adopt written policies promoting diversity, equity, inclusion, and responsible governance within the company.

6. Cash Management Policy: An optional covenant encourages the adoption of an investment and cash management policy, assuring investors that their funds are wisely managed.

7. Pro Rata Waiver Protection: Previously, if investors waived their pro rata rights in connection with a financing, some, but not all, investors who gave up their pro-rata rights could still, by default, participate in financing rounds where those pro-rata rights were waived. The model IRA removes this default, which provides additional protection for smaller investors. 

8. Sanctioned Party Definition: Language has been added to the list of defined terms to address Committee on Foreign Investment in the United States (CFIUS) concerns.

Certificate of Incorporation (Charter):

1. Pari Passu: The model Charter now includes provisions for pari passu preferred stock liquidation and dividends. Customization is required for senior liquidation preferences or dividend distributions.

2. At-Large Directors: The model Charter introduces the concept of At-Large Directors (i.e., Directors designated by a combination of the Common Stock and Preferred Stock) and flexible methods for filling vacancies among them, including by a majority of the Board. Previously only Preferred stockholders, Common stockholders or a majority of both the Preferred stockholders and Common stockholders were able to fill vacancies on the Board in the model legal documents.

3. Requisite Consent Required for SAFE Issuances: The consent of Requisite Investors is now required for issuing Convertible Securities that may convert into capital stock pari passu with or senior to Preferred Stock, offering investors additional protection. This prevents companies from doing additional SAFE or convertible note financings without the investors’ consent.

4. Indemnification of Officers:The model Charter adds an option to indemnify officers, but it does not prevent investors from suing officers directly for certain breaches.

Stock Purchase Agreement (SPA):

1. Conversion of Convertible Instruments: The provision standardizes the conversion of convertible instruments (e.g., SAFEs and convertible notes) upon the close of a financing, reducing uncertainty.

2. Company Representations: The Company Representations are more robust, particularly concerning Intellectual Property and Data Privacy, which may result in more disclosures from companies and aid in investors' due diligence.

Voting Agreement (VRA):

1. Drag Along Right: No significant changes.

2. Sanctioned Party Definition: Language has been added to the list of defined terms to address CFIUS concerns.

Right of First Refusal and Co-Sale Agreement (ROFR):

1. Exempt Transfers: No significant changes.

2. Sanctioned Party Definition: Language has been added to the list of defined terms to address CFIUS concerns.

These updates in the NVCA's model legal documents highlight the evolving nature of the venture capital landscape, and emphasize the importance of staying up-to-date on these changes. For more detailed information, you can access the updated documents directly from the NVCA's resources.

Investors and companies alike should carefully review these changes and consult with legal counsel as needed to ensure compliance and alignment with their investment strategies and objectives.

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