The Impact of the 2023 Changes to the British Venture Capital Association Model Documents on Start-Up Founders

The British Venture Capital Association (BVCA) model documents are a cornerstone of venture capital transactions in the UK, providing a standardised framework for equity investments. These documents, which include term sheets, subscription agreements and shareholders’ agreements, aim to streamline negotiations, reduce legal costs and create transparency between investors and founders.

In February 2023, the BVCA released updated model documents for early-stage investments, aiming to streamline the investment process and balance interests between investors and founders.

Below, we outline these updates and analyse their impact on start-up founders.

Key Changes to the BVCA Model Documents in 2023

1. Separation of Agreements

• What Changed: The previous combined Subscription and Shareholders’ Agreement has been divided into two distinct documents. This enhances clarity and allows for more tailored negotiations specific to each agreement.
• Impact on Founders: Founders benefit from a clearer understanding of the obligations and rights under each agreement, making it easier to focus on specific aspects during negotiations.

2. Founder Rights and Board Composition

• What Changed: Founders now have explicit rights to appoint themselves as directors while employed or providing consultancy services to the company. This right ceases upon their departure, ensuring continued founder influence during their tenure.
• Impact on Founders: This change ensures that founders maintain a strong voice in company decisions while they are actively involved, but it also provides a clear endpoint for their influence if they leave.

3. Leaver Provisions and Vesting

• What Changed: The updated documents simplify leaver provisions by reducing the categories to ‘good’ and ‘bad’ leavers, with clearer definitions. This provides greater certainty regarding equity stakes in various departure scenarios.
• Impact on Founders: Founders gain more predictable outcomes for their equity in case of departure, reducing ambiguity and potential disputes.

4. Warranties and Disclosures

• What Changed: There’s a shift away from requiring founders to provide extensive warranties, particularly in larger or later-stage deals. Early-stage investments may still necessitate some founder warranties.
• Impact on Founders: This reduces personal liability for founders, making the process less daunting and allowing them to focus on building the business. Note that in any case any claim by investors for breach of warranty is exceptionally rare.

5. Pre-emption Rights

• What Changed: The updated documents limit pre-emption rights to major investors, simplifying future fundraising by reducing potential obstacles from minority shareholders.
• Impact on Founders: Founders benefit from fewer administrative hurdles and more streamlined fundraising processes, enabling faster access to capital.

6. Conduct of Business and Governance

• What Changed: New undertakings promote enhanced corporate governance, including adopting codes of conduct, diversity policies and data protection compliance.
• Impact on Founders: These measures align the company with institutional investor expectations and foster a positive workplace culture, but they may require additional administrative effort.

7. Cost Allocation

• What Changed: The Subscription Agreement now stipulates that the company covers only the Lead Investor’s costs. This potentially reduces the financial burden on startups, though founders should watch for any abortive fees or additional cost demands during negotiations.
• Impact on Founders: This change alleviates some financial strain but underscores the importance of thorough cost reviews during negotiations.

8. ESG and Sustainability Provisions

• What Changed: The 2023 revisions introduced explicit provisions addressing Environmental, Social, and Governance (ESG) factors. These include obligations for portfolio companies to adopt sustainable practices, monitor carbon footprints and align with investor-driven ESG policies.
• Impact on Founders: Start-up founders must now consider the operational and financial implications of meeting ESG requirements. While this promotes long-term sustainability, it could increase short-term costs and administrative burdens.

9. Diversity and Inclusion (D&I) Requirements

• What Changed: Clauses promoting diversity and inclusion were added. For example, portfolio companies may need to report on board diversity or implement recruitment practices aimed at increasing diversity.
• Impact on Founders: Founders must be proactive in fostering an inclusive culture and implementing policies that align with investor expectations. While this can enhance workplace dynamics and reputation, it may require additional resources.

10. Enhanced Data Protection Obligations

• What Changed: Reflecting increased regulatory scrutiny, the documents now emphasise data protection compliance, including adherence to GDPR and other privacy laws.
• Impact on Founders: Start-ups must prioritise robust data protection measures, which could increase legal and operational costs. However, this aligns businesses with best practices and reduces regulatory risks.

11. Anti-Dilution Protections

• What Changed: The 2023 revisions refined anti-dilution provisions, particularly in relation to down-round financing. Weighted-average adjustments have been clarified and the rights of investors in scenarios where shares are issued at a lower price than their original investment are now more explicitly detailed.
• Impact on Founders: These updates ensure greater certainty for investors but could lead to higher dilution of founder equity during down-rounds. Founders must carefully negotiate these terms to minimise the impact on their ownership stakes.

12. Liquidation Preference Provisions

• What Changed: Liquidation preferences have been updated to include clearer language on the hierarchy and prioritisation of payouts. The revisions emphasise transparency around participating vs. non-participating liquidation preferences and the rights of different classes of investors.
• Impact on Founders: Founders gain a better understanding of payout structures in exit scenarios, but they must ensure these provisions align with their financial expectations and the overall valuation of the company.

The Overall Impact of the 2023 Changes on Start-Up Founders

1. Increased Compliance Burden

The added focus on ESG, D&I, and data protection increases the operational and administrative burden on start-ups. Founders need to allocate resources for compliance, which may divert attention from growth initiatives.

2. Negotiation Challenges

With stricter investor protections, founders may find it more challenging to negotiate favourable terms. Early-stage companies must balance investor demands with maintaining enough control to drive their vision.

3. Enhanced Opportunities for Growth

While the updates introduce new requirements, they also align start-ups with best practices that improve investor confidence. Companies meeting these standards are more likely to attract high-quality investors and scale effectively.

4. Strategic Planning for Exits

The clarity on drag-along rights and warranties allows founders to plan more effectively for potential exits. However, founders must be vigilant to ensure these provisions do not disadvantage them during acquisition or IPO processes.

Conclusion

The 2023 updates to the BVCA model documents reflect the evolving venture capital landscape, with a stronger emphasis on sustainability, compliance and investor protections. Key changes, such as the separation of agreements, clearer leaver provisions and enhanced governance measures aim to create a more equitable environment for founders while addressing investor expectations.

Start-up founders must approach these agreements with a clear understanding of their implications and seek expert legal advice to navigate negotiations effectively. At The Jonathan Lea Network, we specialise in advising start-ups and entrepreneurs on venture capital transactions, ensuring that you are well-prepared to succeed in this competitive landscape.

Contact us today to learn how we can support your fundraising and investment needs.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.