It’s a common issue: a US venture capitalist and a European company agree on the commercial terms of an investment transaction and think that the hard work is done but quickly find themselves at an impasse over the way the transaction will be documented. With the increase in cross-border venture capital transactions, particularly US investors taking stakes in European companies, this is an issue that companies and investors are dealing with more regularly than ever before.
From a commercial perspective, a venture capital transaction (where an investor or a group of investors privately acquires shares in a company) should essentially be the same transaction, regardless of jurisdiction. In practice however, documentation styles vary considerably outside of the US, which can be seen to be frustrating by many venture capitalists, the majority of which are US based.
This article focuses on two of the principal forms of venture capital documentation – US (NVCA) and UK (BVCA) – that are often looked to as international standard form investment documentation. This article seeks to identify several of the more salient aspects in which these two forms of documentation diverge from each other and should act as a guide for US based investors who are looking to invest into European companies and for European based investors looking to invest into the US.
A typical venture capital transaction, whether it is an investment into a US or a UK company, involves the following key elements:
- The investor or investors subscribe for (referred to as “primary”) or purchase equity (referred to as “secondary”) in a private company in return for cash.
- Investors typically receive a class of preferred stock which provides a priority right to receive payments in the event the company is sold, liquidated or wound-up.
- The company and, in some cases, its key executives or founders provide investment related protections (representations, warranties or indemnities) to the investors about the company and its business.
- The investors are given various rights by the company, including rights to receive financial and other information relating to the company.
- The investors are given board membership, granted board observer or other representation rights.
- The rights of the parties on an “exit”, particularly an initial public offering or sale of the company, are defined.
When comparing documentation used in typical US and UK venture capital transactions, a number of key differences emerge, including, in particular:
- form and style of documentation (inclusive of terminology used);
- corporate vehicle;
- representations and warranties; and
- scope and style of investor protections.
Compliments of Orrick – a member of the EACCNY