National Venture Capital Association

Recently, we discussed generally the NVCA’s updated model legal documents on this blog. Of particular interest in the new forms is the NVCA’s attention to anti-discrimination and anti-harassment policies for emerging companies. Discrimination and harassment issues have impacted many industry-leading companies in the last year – and investors, board members and company executives all have aligned interests to ensure that the companies they are building are actively working to prevent discrimination and harassment.

Word cloud of harassment-related termsTwo of the documents published by the NVCA are the “Sample H.R. Policies for Addressing Harassment and Discrimination” and the “Sample H.R. Best Practices for Addressing Harassment and Discrimination”. Although the sample documents state that they were developed for use by venture capital firms and are not designed to be used as models for other companies without legal guidance, the documents provide a general framework that may be useful to many growing companies when considering how to implement such policies.

Key provisions covered by the documents include: the company’s mission statement, provisions explaining the company’s policies relating to harassment and discrimination, definitions of prohibited conduct, and examples of prohibited conduct. The documents include bracketed optional provisions that apply in certain states and localities, as well as a link to California’s anti-harassment pamphlet that must be given to all new hires.

In addition to these general documents, the NVCA has published documents that apply in several key jurisdictions where startups are frequently located. Examples include the sample Diversity and Inclusion Policies for San Francisco businesses and a Diversity Policy designed for use by businesses located in New York.

These documents provide a useful starting point for emerging companies as they develop policies relating to anti-discrimination and harassment, even if the documents are not designed to be used in the same off-the-shelf manner as the NVCA’s model legal documents.

The National Venture Capital Association (NVCA) publishes model legal documents for venture capital financings, including a Certificate of Incorporation, Preferred Stock Purchase Agreement and Investors Rights Agreement. These documents enjoy wide industry acceptance as baseline agreements that parties and their counsel can tailor for each deal. They also include commentary on East and West Coast practice and bracketed alternative provisions to insert/omit depending on the deal terms. Perhaps most attractive to the parties, starting from a standardized form can decrease legal hours (and, more importantly, fees) from term sheet to closing.

Venture capital
Copyright: ar130405 / 123RF Stock Photo

Recently, NVCA updated the model legal documents for the first time since 2014. Considering the wide use of these documents, these revisions are likely to impact future VC financings. Here are some of the key changes:

Certificate of Incorporation

  • Protective Provision for Cryptocurrency/Blockchain Issuances: VCs typically negotiate for veto rights over a company issuing additional equity and debt securities. Now, the model Certificate includes a protective provision giving investors the right to veto token, cryptocurrency and blockchain-related offerings.
  • Redemption Rights: VCs might negotiate for a redemption right, which requires the company to repurchase their preferred stock under certain conditions.  If the company does not fulfill a redemption request, the model Certificate now includes a high rate of interest on the redemption price of any shares not redeemed “for any reason”. Recent case law suggests that a board may be protected by the business judgment rule if it determines not to use funds to redeem preferred stock despite an obligation to do so.  (See e.g., TCV VI, L.P.  Trading Screen, Inc., Case No. C.A. 10164-VCN (Del Ch. Ct. Feb. 26, 2015); SV Investment Partners, LLC v. Thoughtworks, Inc., Case No. C.A. 2724 (Del. Ch. Ct. Nov. 10, 2010). Triggering an interest payment “for any reason” gives investors increased leverage and some compensation.

Stock Purchase Agreement

  • Provisions for Life Science Transactions: Life science companies are attractive to VCs due to their potential for rapid growth and significant ROI. The updated Stock Purchase Agreement includes provisions specific to life science transactions.  These include more robust treatment of milestone closings, including undersubscription procedures and penalties for an investor’s failure to close, and new reps and warranties related to government and university sponsored research, clinical trials and FDA approvals.

Investors Rights Agreement

  • Anti-Harassment Covenant: In a timely addition, the Investor Rights Agreement now includes a covenant requiring the company to adopt an anti-harassment policy and a code of conduct governing appropriate workplace behavior. NVCA recently published a set of model documents and resources addressing harassment and discrimination.

Voting Agreement

  • Drag Along Rights: A drag along provision can permit VCs to “drag” the junior preferred and common holders into a sale of the company.  Under certain circumstances, dragged shareholders can receive little or no compensation in a drag sale, which may prompt a legal challenge.  The updated drag provision is intended to more effectively implement drag transactions and reduce the likelihood of a minority stockholder claim.

Users already familiar with NVCA’s model documents will be glad to see the revisions are not extensive.  However, given the wide acceptance of these forms, it’s safe to say that the updates will be impactful. This is especially true with respect to anti-harassment policies, which is both a high-profile issue and has obvious benefits for all parties.  Stay tuned to Emerging Companies Insider for a follow-up blog addressing NVCA’s new model documents addressing harassment and discrimination.

The Trump administration recently announced it is delaying – and likely rescinding – the Obama-era International Entrepreneur Rule (the “Rule”). The Rule was slated to go into effect on July 17, 2017. It would have made it easier for foreign entrepreneurs to establish startup companies in the U.S. We blogged in detail on the final Rule when it was published in early 2017.

The White House, Washington, D.C.Now the Rule’s effective date has been delayed until March 14, 2018; however, implementation seems highly unlikely: the delay is to allow the Department of Homeland Security (DHS) an opportunity to obtain public comment on a proposal to rescind the Rule.

The Rule establishes criteria for granting “parole” (temporary permission to be in the U.S.) to certain foreign entrepreneurs to permit them to oversee and grow their stateside startups. To obtain parole, entrepreneurs would need to show that their startups have potential to grow rapidly, create jobs and provide a significant public benefit to the United States. Startups would be judged by, among other things, how much venture, angel or accelerator capital and/or government grants they’d received.

DHS decided to delay the Rule after President Trump signed an executive order on January 25, 2017 relating to border security and improving immigration enforcement. The order required DHS to ensure that parole is only granted on a case-by-case basis involving urgent humanitarian reasons or a significant public benefit. DHS is seeking public comment on the delay until August 10, 2017.

The move has drawn criticism from notable investors, business leaders and other stakeholders, including the National Venture Capital Association, a trade association for startup investors. Critics note the substantial contributions made by immigrants to the U.S. entrepreneurial ecosystem, especially in the tech sector. For example, 60% percent of the top 25 tech companies and 42% of Fortune 500 companies were founded by first- or second-generation Americans according to a 2013 report published by the venture-capital firm Kleiner Perkins Caufield and Byers. The Rule is not dead yet, but the prognosis is grim. The uncertainty alone seems likely to make the U.S. less competitive in the global market for ambitious and innovative minds.