NVCA Model Legal Documents: The complete guide for founders

When you’re going through a fundraise, there are a lot of documents that need to be agreed.

Instead of drafting every document from scratch (which would waste time and increase legal fees) it’s best to use standardized documents that investors are already familiar with.

Fortunately, you (and your lawyers) can use the NVCA Model Legal Documents for your fundraise. The National Venture Capital Association (NVCA) is an organization that represents the venture capital industry in the US – and they also play a major role in supporting startups.

They’ve created a standardized set of financing documents called the Model Legal Documents. These documents ensure that the key deal terms are represented in a way that investors expect, which reduces friction in the negotiation process – that’s why 85% of companies use these forms for their series A fundraisings.

Your final investment documents will be negotiated by your lawyers. But it’s useful for you to understand the Model Legal Documents. So, in this article, we’ll go through the five main investment documents and explain what each of them does.

Advantages and disadvantages of the NVCA Model Legal Documents

The main advantages of the NVCA Model Legal Documents are:

• Standardization: The NVCA documents are widely recognized, which can simplify negotiations by providing a common starting point for all parties.
• Cost efficiency: Using the NVCA documents as a starting point can mean less spend on legal fees as your lawyers won’t be drafting documents from scratch.
• Comprehensive coverage: The NVCA templates are comprehensive, covering all the major aspects of a fundraise.
• Balanced approach: The documents are designed to be fair and balanced, protecting the interests of both investors and entrepreneurs.

Some disadvantages of the NVCA Model Legal Document are:

• Complexity: The documents are comprehensive but could be considered unnecessarily complex, especially for smaller deals.
• Investor bias: Some argue that the NVCA documents may still favor investors (particularly in areas like protective provisions and liquidation preferences).

The five main NVCA Model Legal Documents

These five main documents are:

1. Certificate of Incorporation
2. Stock Purchase Agreement
3. Voting Agreement
4. Investor Rights Agreement
5. Right of First Refusal and Co-Sale Agreement

Certificate of Incorporation

The Certificate of Incorporation (sometimes called the Charter), is the main governing document for your company. It’s filed with the state where your company is incorporated (usually Delaware) and becomes public record (it’s the only document of the five that’s publicly filed).

Before any fundraise, the founding team would typically own 100% of the company’s stock (which will almost always be common stock). But when a new class of stock is created, or the number of authorized shares increases, your company’s Certificate of Incorporation will need to be changed to reflect this. So that’s why you’ll need a new one when you get external investment.

The main purposes of the Charter would be:

• Rights associated with the stock: To set out the preferences, rights, and privileges associated with the class of stock being created, along with the rights and protections for the new stockholders. For example, it might include things like anti-dilution provisions (to protect investors if future shares are sold at a lower price), liquidation preferences for investors (which determine the order and amount investors get paid if the company is sold or liquidated) and voting rights for each share.
• Establish protective provisions: To include any significant actions which require the prior approval of preferred stockholders, like issuing more shares, selling or liquidating the company, changing the board or directors or amending the Certificate of Incorporation (these are called “Protective Provisions”).

Essentially, the Certificate of Incorporation secures the rights of the investors under Delaware corporate law and ensures their interests are protected in the company’s decision-making processes. Understanding it as a founder is useful so you’re aware of the rights and control new investors have in your company.

Stock Purchase Agreement

The Stock Purchase Agreement (SPA) details what investors are buying in your company and the terms of their purchase.

The SPA covers things like:

• Price per share: The agreed price at which each share of stock will be sold.
• Number of shares: The total amount of stock being issued to the investors.
• Closing date: The timeline for completing the investment (including any deadlines for more investors to join later).
• Representations and warranties: Statements made by both the company and the founders confirming certain facts about the company’s status. For example, investors would expect a warranty that said, effectively, “The company is properly set up and has the legal right to operate its business.”

An essential part of the SPA is the disclosure schedule, which lists any exceptions to the representations and warranties. It lets founders disclose instances where a warranty isn’t true. This protects you, as a founder, from being accused of hiding this information, plus it lets investors have a more complete picture of the company.

For example, if the warranty states that “the company has no ongoing legal disputes”, but there is a minor lawsuit pending, this could be mentioned in the disclosure schedule. As well as protecting the founders, the disclosure schedule ensures investors have all the information before finalizing their investment.

Voting Agreement

The Voting Agreement requires all investors and stockholders with more than 1% ownership to vote their shares in certain pre-agreed ways.

Key elements of the Voting Agreement are:

• Board structure: This section states that all shareholders agree to vote for given board members, details how board members are elected or removed, and who has the authority to appoint them.
• Drag-along rights: These rights mean that each person signing the Voting Agreement agrees to vote their shares in favor of a sale of the company, so long as the sale has been approved by the board and a majority of the stockholders. This right helps avoid potential roadblocks when the company’s being sold.

The aim of the Voting Agreement is to provide predictability in the company’s board composition and in connection with any sale transaction, which both founders and investors should be comfortable with.

Investor Rights Agreement

The Investor Rights Agreement (IRA) covers rights granted to investors, particularly those holding preferred stock. It sets out how their interests are safeguarded as the company grows and potentially goes public.

Some of the key elements of the IRA are:

• Registration rights: These rights allow investors to require the company to register their shares for public sale in an initial public offering, which is crucial if the company plans to go public. It can also give investors the ability to push for a public listing.
• Preemptive rights: Also known as rights of first offer, these rights enable certain investors to buy shares in future fundraising rounds. So, if the company issues more shares, some existing investors are able to maintain their ownership percentage.
• Information rights: These rights give investors access to information about how the company’s performing. Usually, it’ll focus on financial information but it can include other data points from the company too (such as customer growth or product progress).
• Observer rights: These rights allow investors to sit in board meetings, even if they don’t have a seat on the board or a right to vote. This provides them with insight into the company’s decision-making process.

The IRA is important for investors – it gives them the ability to monitor and participate in major company events. As a founder, you should understand the IRA because it determines the level of control and access investors will have over the company’s operations and future fundraising.

Right of First Refusal and Co-Sale Agreement

The Right of First Refusal and Co-Sale Agreement (ROFR) sets out the rules on how the company’s shares can be transferred and who can receive them. It’s important for controlling who can become a shareholder and allowing investors to protect their ownership in the company.

Key elements of the ROFR include:

• Right of first refusal: This right means that, before a founder or key shareholder can sell their shares to someone, they have to first offer them to the company and the existing investors. This gives the company and investors the opportunity to purchase the shares under the same terms, keeping ownership within the existing group.
• Co-sale rights: If a founder or key shareholder wants to sell their shares to a third party, this right allows existing investors to join in and sell a proportional amount of their shares under the same terms. So, if the selling shareholder secures really favorable terms, other investors can take part.
• Exempt transfers: Certain transfers (like those made to family members or affiliated companies) can be exempt from any limits on transfers. These exemptions are typically negotiated and specified in the agreement to allow some flexibility on who you can transfer your shares to.
• Lock-up restrictions: These are limitations on transferring shares before or after the company goes public, which help stabilize the stock price and manage the timing of share sales.

The ROFR is essential for maintaining control over the company’s ownership and ensuring that key shareholders or founders cannot sell their shares without giving the company and existing investors a chance to buy them first. For you as a founder, understanding this agreement will help you know the conditions under which you can sell your shares.

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