It is apt that in the transition to adulthood, the Model Legal Documents (the “Model Docs”) for venture capital financing transactions, created by the National Venture Capital Association (NVCA), have undergone their most significant revisions since their inception. They now bear the relaxed vibe akin to someone who has just experienced their first tequila shot, evident in the revisions to the IP representations and required disclosures within the Model Stock Purchase Agreement.
The NVCA has recently introduced the 12th update to the Model Docs, marking their unquestionable dominance in the market. However, it is worth noting that their adoption was a gradual process, as revealed by a recent study.
The Model Docs are both free and of exceptional quality. The reason behind the delay in their adoption can be attributed to the conservative nature of the legal industry. The Model Docs were meticulously drafted by a committee of lawyers and required widespread acceptance by leading law firms.
Let’s take a moment to celebrate this remarkable idea, which took a little over two decades to gain widespread recognition. Now, let’s explore the ripple effects of this transformative concept.
Bringing up the rear, we turn our attention to Britain. Despite the fact that some lawyers there still wear powdered wigs, it was only this year that the British Venture Capital Association released their own set of Model Documents for Early-Stage Investments, closely resembling the NVCA’s Model Docs. Surprisingly, this development caught me off guard, as a decade ago, I had written a piece in TechCrunch highlighting the lack of innovation in the U.S. legal system. At that time, the U.K. was ahead of the curve, even allowing non-lawyers to own and operate legal service businesses.
However, I retract my praise for the British legal system, as until recently, they imposed on entrepreneurs terms that the Model Docs had long discarded. These included exhaustive M&A-style representations and warranties, as well as founder personal liability for breaches. This created a significant hindrance to starting a venture-backed business in the U.K.
In the legal world, our motto seems to be “Not never. Just late.” So, kudos to the BVCA and the drafters who spent three years developing the British Model Docs. Now, if only we could share this wisdom with our colleagues in Germany, where venture financings are almost as antiquated as a traditional dirndl.
The excessive adornment of German financing documents with stickers and ribbons, known as “apostille,” almost turns them into collector’s items. The requirement for a notary to read these documents aloud in front of all parties adds a charming touch.
Back when I first proposed the Model Docs project, it was considered radical by large law firms who fiercely competed for market share. However, they eventually realized that creating and distributing standardized documents wouldn’t lead to the downfall of their businesses. Transactions have become significantly more efficient with the Model Docs, allowing junior attorneys to take advantage of the embedded user manual. But, have transaction costs actually decreased? Unfortunately, the legal industry tends to keep efficiency gains for themselves rather than passing on the savings to clients.
Law firms also learned that everyone benefits when startups use high-quality or at least functional documents. Clients who use random forms found on the internet create additional headaches and expenses, which the law firms must then rectify.
As a result, after collaborating on and adopting the Model Docs, the significant law firms with thriving emerging company practices started offering basic documents for free on their websites. For instance, CooleyGO, Goodwin’s Founders Workbench, WilmerHale’s Launch, and Wilson Sonsini’s Neuron.
Now, some of the early contributors to the Model Docs have developed the first cross-platform collaborative form. This serves as both a tool and a form, addressing a persistent issue faced by service 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.”
Thanks to the Model Docs, venture financings can now be completed in a week or two if necessary. This was unimaginable when law firms on both sides spent weeks disparaging each other’s forms. However, there is one area within emerging company practice that makes those early days seem remarkably fast – startups licensing technology, intellectual property, or assets from academic institutions. These deals are measured in months, not weeks, due to similar dynamics as in 20th-century venture transactions, coupled with mistrust and a zero-sum game mentality.
During the COVID pandemic, a group of individuals from university licensing offices and venture capitalists joined forces to address this problem. They created “US-BOLT”: University Startup Basic Outlicensing Template (for life science transactions). Initially met with skepticism, they now have not only a term sheet but also a soon-to-be-released license agreement. Its impact remains to be seen, but it has the potential to facilitate the academic-entrepreneurial complex.
If it’s even partially as successful as the Model Docs, this effort promises to expedite these deals within a couple of months in a decade or two, turning promising laboratory innovations into therapeutic solutions for patients. My own experience, along with my optimistic perspective as an attorney, leads me to believe in this transformative potential.
