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Model documents for early-stage investments

The BVCA has revised and re-launched its standardised documents for early stage venture capital investment after a major review involving the BVCA’s Legal & Technical and Venture Capital committees and a working group comprised of experts from the investor and legal community.

October 2014

Our aim is simple: to promote industry-standard legal documentation in the UK so investors and entrepreneurs can focus on deal-specific matters. This will inevitably save both time and money and follows the precedent seen in the US. We encourage all parties to adopt these documents as the starting point for their investments, and we will seek to update them on an annual basis to ensure they continue to reflect market practice. Comments on the documents are welcome, and will be taken into account in the next review.

The BVCA has published a revised version of its model Term Sheet, Subscription and Shareholders’ Agreement and Articles of Association together with an accounting briefing on the treatment of preferred shares (as either debt or equity in the company’s accounts). Firms will need to consult with their auditors before the articles are finalised if they want to ensure that preferred shares are treated as equity in the accounts of the company. We are now working on the drafting notes to support the suite of model documents.

These documents have been drafted for use on a Series A funding round. They envisage a significant investment being made in whole or in part by fund investors. They are not suitable for seed investment and further information to assist entrepreneurs in this area can be found in the drop down tab on the right.

The BVCA would like to thank Simon Walker (Taylor Wessing), Susanna Stanfield (JAG Shaw Baker), John Heard (Abingworth), Alastair Breward (Amadeus) and Steve Parkinson (EY) for their continued support throughout this project.

September 2015 update: On 6 April 2015, the Companies Act 2006 (Amendment of Part 18) Regulations 2015 (the “2015 Regulations”) came into force, which amended the Companies Act 2006 (the “2006 Act”) by clarifying the operation of certain provisions introduced by The Companies Act 2006 (Amendment of Part 18) Regulations 2013 that had originally sought to relax some of the statutory requirements which applied to companies when undertaking share buy backs. The de-minimis cash exemption (for private companies) originally set out in section 692(1)(b) of the 2006 Act has now been moved to a new section 692(1ZA), which has been redrafted to make it clear that (i) a private company is permitted (where authorised by its articles) to make small buy backs out of capital in a financial year without being subject to the permissible capital payment provisions in Part 18 Chapter 5 of the 2006 Act, and (ii) the second limb of the maximum aggregate purchase price that can be paid under the exemption is the nominal value of 5% of the company's fully paid share capital at the beginning of the financial year. As a result of this change to section 692 of the 2006 Act, article 3.4 of the Model Articles has been accordingly amended.

Note on form of Subscription and Shareholders' Agreement

The Subscription and Shareholders' Agreement has been drafted for signature as a contract under hand, which avoids the execution formalities required for deeds. This approach is generally supported by opinion of Counsel (available here) with the caveat that specific legal advice must always be sought for each particular situation.

Legal disclaimer: Neither the BVCA nor any member of its committees or working groups takes any responsibility for the content of the documents or the consequences of using them and that it is essential that legal advice is sought before using the documents.These documents are intended to serve as starting point only and should be tailored to meet your specific legal and commercial requirements. None of the documents should be construed as legal advice for any particular facts or circumstances.

Classification of shares: Accounting standards (including international and UK accounting standards) establish principles for presenting financial instruments as liabilities or equity. Firms should review the terms and rights attached to shares (and in particular preferred shares) to determine the classification and presentation of these instruments in the financial statements of a company. Depending on the facts or circumstances, certain types of shares could be classed as debt under accounting standards.

BVCA Model Articles of Association

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BVCA Model Subscription & Shareholders' Agreement

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BVCA Model Term Sheet for a Series A Round

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BVCA Model Subscription & Shareholders' Agreement (Opinion)

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BVCA Technical Briefing - Accounting Treatment of Preferred Shares

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Documents for seed investments

The BVCA model documents have been drafted for use on a Series A funding round. They envisage a significant investment being made in whole or in part by fund investors. In the view of the BVCA, the model documents are not appropriate for use in connection with a seed funding round. Such rounds are typically documented using shorter form documents which are either replaced or updated for a Series A round.

Many law firms, entrepreneur networks and other organisations offer template documents suitable for seed investing, which are available over the internet. The BVCA does not make a specific recommendation on which suite is most suitable, due to the wide variety available and the range of seed investing circumstances.

However, in choosing a suite for a seed funding round, the following factors should be borne in mind:

  • Is the suite appropriately detailed for the specific circumstances (e.g. a £20,000 loan from one individual would need less detail than a £1,000,000 equity seed round with multiple investors including institutional VC funds).

  • Where relevant in the light of the above, does the suite contain all the documents you will need such as:

    • Term Sheet (high level summary of the agreed arrangements, not usually legally binding save as to certain provisions like confidentially and sometimes exclusivity)
    • Confidentiality Agreement (to protect materials disclosed to investors to help them evaluate investment)
    • Investment/Shareholders agreement(s)
    • Articles of Association

    And do all of the above work together fluently?

  • Is the suite written in plain English and as short-form as is compatible with the objectives of the documents?

Further information

FOR FURTHER INFORMATION PLEASE CONTACT THE BVCA

 +44 (0)20 7492 0400

policy@bvca.co.uk