The Main Points In The BVCA Model Documents That A Start-Up Should Negotiate On

The British Private Equity and Venture Capital Association (BVCA) model documents provide a standard framework for venture capital investments in UK startups.

However, while these documents are considered fair starting points, startups raising money from investors should carefully negotiate key provisions to ensure their interests are protected. Below are the main points startups should focus on:

1. Valuation and Ownership

• Pre-Money Valuation: Negotiate the valuation to ensure it reflects the true potential of the business.
• Dilution Protections: Understand the impact of investor preferences, anti-dilution provisions, and subsequent funding rounds on founders’ ownership.

2. Investor Rights

• Board Representation: Discuss whether the investor will have a seat on the board and the extent of their influence over company decisions.
• Observer Rights: Investors often request observer rights at board meetings; startups should limit these to avoid overreach.

3. Liquidation Preferences

• Preference Multiples: Negotiate the multiple investors are entitled to on exit (e.g., 1x liquidation preference).
• Participation Rights: Limit “participating preferred” shares that allow investors to take both their preference and a share of remaining proceeds.

4. Anti-Dilution Protection

• Type of Protection: Ensure that investor anti-dilution protection (e.g., full ratchet or weighted average) is fair and doesn’t excessively penalise founders.
• Trigger Events: Limit triggers to genuinely dilutive scenarios, such as down rounds, rather than any new share issuance.

5. Control and Veto Rights

• Reserved Matters: Investors often request veto rights on key business decisions (e.g., issuing shares, taking on debt). Negotiate to ensure founders retain autonomy for operational decisions.
• Quorum: Ensure voting thresholds do not give investors undue control over board or shareholder decisions.

6. Founder Protections

• Founder Vesting: If founders’ shares are subject to vesting or reverse vesting, ensure the terms are reasonable (e.g., a standard 4-year vesting schedule with a 1-year cliff).
• Bad Leaver/Good Leaver Clauses: Define “good” and “bad” leaver scenarios clearly to avoid losing equity unfairly in cases of termination or resignation.

7. Exit Provisions

• Drag-Along Rights: Limit drag-along provisions to ensure founders are not forced into unfavourable exits.
• Exit Timing: Avoid strict deadlines for exit events that may pressure founders into premature sales.

8. Warranties and Indemnities

• Scope of Warranties: Negotiate to ensure founders are not exposed to excessive personal liability for representations made in the investment agreement.
• Cap on Liability: Agree on caps for liability, ideally limited to the amount invested by the founders.

9. Information Rights

• Reporting Obligations: Limit the frequency and detail of reporting to avoid excessive administrative burdens.
• Confidentiality: Ensure that any information shared with investors is subject to robust confidentiality clauses.

10. Future Fundraising

• Pre-Emption Rights: Negotiate terms around the investors’ rights to participate in future funding rounds, ensuring flexibility for new investors.
• Limits on Further Fundraising: Avoid strict restrictions that could prevent raising additional capital without investor consent.

11. Employment Terms for Founders

• Employment Agreements: Clarify founders’ remuneration, benefits, and equity ownership to avoid disputes post-investment.
• Non-Compete Clauses: Ensure non-compete clauses are reasonable in scope and duration.

12. Intellectual Property (IP)

• Ownership: Confirm that all IP resides with the company and not the founders personally.
• Assignment: Ensure founders and key employees have appropriately assigned their IP rights to the company.

13. Miscellaneous

• Costs: Negotiate who bears the legal and due diligence costs of the transaction—startups should aim to cap their exposure.
• Governing Law and Jurisdiction: Ensure the agreement is governed by a jurisdiction favourable to the startup, typically England and Wales.

By negotiating these terms effectively, startups can secure a fair deal while maintaining the flexibility and control needed to grow their business. Engaging experienced legal advisors is essential to navigating these complex agreements.

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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.