Sarah Reed
It is fitting that, in their transition to adulthood, the National Venture Capital Association’s (NVCA) Model Legal Documents (the “Model Docs”) for venture capital financing transactions have not only undergone their most substantial revisions since inception, but also reflect the more relaxed vibe of someone who has just had their first tequila shot (see, e.g., the revisions to the IP reps and required disclosures in the Model Stock Purchase Agreement).
The NVCA recently posted the 12th update to the Model Docs since they were first published in 2003. They now clearly have achieved market dominance — although this recent study shows that adoption was a slow burn.
The Model Docs are both free and excellent. So why did it take so darned long? Although there is no direct antonym for “change agent,” the closest would probably be “lawyers” and “committees.” The Model Docs were drafted by a committee of lawyers and required mass adoption by the leading law firms.
So let’s take this occasion to raise a glass to a great idea that took only two decades and change to triumph and examine the knock-on effects of that great idea.
Britannia, bringing up the rear
If you recall that in England some lawyers still wear powdered wigs, it may come as less of a shock to learn it was only this year that the British Venture Capital Association promulgated their own set of Model Documents For Early-Stage Investments that mirror the Model Docs.
Actually, that news was pretty unsettling to me, because a decade ago I wrote a piece in TechCrunch about the woeful lack of innovation in the U.S. legal ecosystem, bemoaning the fact that the U.K. was seemingly way ahead of us — they were, for example, permitting non-lawyers to own and operate legal service businesses.
So, yes, I retract my plaudits for the Brits because, until recently, they were still asking entrepreneurs to suck up egregious terms that we’d abolished long ago in the Model Docs — terms such as exhaustive (and exhausting) M&A-style reps and warranties, and founder personal liability for the breach of same.
They also included these crown jewels, among others: Forfeiture of vested shares if terminated for poor performance (as opposed to egregious misconduct) and a requirement to get the consent of each and every one of your investors every time you hired an employee or granted them options. It’s a wonder anyone wanted to start a venture-backed business in the U.K. at all!
Our motto in the legal profession could be “Not never. Just Late.” So, huzzah for the BVCA and the drafters who spent three years laboring over the British Model Docs. Now if we could just spread the word to our peers in Germany, where venture financings are almost as quaint and colorful as a dirndl.
The stickers and ribbons (“apostille”) on German financing documents make them almost a collector’s item, and who wouldn’t be charmed by the preclosing requirement for a notary to read them out loud in the presence of the parties?
Free is better than F’d up
Back when I first proposed the Model Docs project, it was pretty much apostasy for the large law firms, who were all fiercely competing for market share, to collaborate in the way I was advocating. But eventually they got on board — and what have they learned from this maverick project? For starters, that creating and giving away form documents would not lead to the demise of their businesses.
It’s unquestionably easier and faster to do transactions now with the Model Docs — any smart junior attorney can take advantage of the user manual embedded in them. Have transaction costs correspondingly plummeted? What do you think? (As I noted in 2014, lawyers are adept at securing efficiency gains for themselves rather than passing them along to clients in the form of savings.)
The firms also learned that everyone is better off when startups use documents that are “best in class,” or even just “not broken.” When you get a new client who found their employee equity documents on random websites and used some weird forms for a first financing round, it just creates more headache and expense (that you will have to explain to the client) to straighten everything out.
So, better to acknowledge that many of the legal documents that startups need are essentially commodity forms and just give them away for free.
Thus, following their collaboration on and adoption of the Model Docs, within a few years, the large law firms with significant emerging company practices all began to give away such basic documents on their websites. See, for example, CooleyGO, Goodwin’s Founders Workbench, WilmerHale’s Launch, and Wilson Sonsini’s Neuron.
Now, none too soon, some of the firms that were early participants in the drafting of the Model Docs have produced the first cross-platform collaborative form. It is as much a tool as a form — and a much needed one, addressing a persistent pain point faced by services providers to private companies.
In the words of the Open Cap Table Coalition: “For the first time in the private company equity management space, industry leaders from across the entrepreneurial ecosystem are coming together to create an industry group called the Open Cap Table Coalition to improve the interoperability, transparency, and portability of startup cap table data.”
New frontiers
With the benefit of the Model Docs, venture financings can now, in a pinch, be completed in a week or two. That was unthinkable back in the day when the law firms on both sides first had to spend a few weeks just disparaging each other’s forms. There does remain an emerging company practice area, though, that makes those bad old days look like warp speed.
Heck, it makes Germany look nimble. That would be startups in-licensing technology/IP/assets from academia. Those deals are measured in months, not weeks. Some of the same dynamics are in play as those found in 20th-century venture transactions. There is great uncertainty about what is a “market,” and no one wants to be made a fool.
There is considerable mistrust between the parties, exacerbated by a “zero-sum game” contracting mentality rather than one predicated on economic alignment. (Here is for a longer discussion about what is currently broken and how it can be fixed.)
During COVID, with nothing better to do than endurance Zoom meetings, a coalition of the willing came together to try to solve this problem by creating “US-BOLT”: University Startup Basic Outlicensing Template (for life science transactions). The starting premise was: “It probably can’t be done — but we acknowledge that it was done for venture financings and so, sigh, we will give it a go.”
For a group of battle-hardened frenemies representing both university licensing offices and VCs during the darkest COVID days, this was unbridled optimism. Three years later, we have not only a term sheet, but a soon-to-be-released license agreement to go with it. It is all very new, and thus it remains to be seen what kind of traction it will get and how greatly it may grease the wheels of the academic-entrepreneurial complex.
If even partly as impactful as the Model Docs, that work holds the promise of liberating many more great ideas from the lab and turning them into promising therapeutics for patients. My own experience, and my congenitally rosy outlook as an attorney, make me a believer. Give it a decade or two, and I think we can get these deals done in just a couple of months!
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