Venture financing is the lifeblood of an early-stage company. Without startup capital, many startups could not navigate through the early stages of the business to establish and prove out the business thesis. Fortunately, in the US and the UK, investors and startups have standardized legal documentation as a starting point to structure venture financings. In the US, these documents are published by the National Venture Capital Association (NVCA), while in the United Kingdom, the British Private Equity & Venture Capital Association (BVCA) serves a similar role. Though they share common goals—efficiency, predictability, and greater certainty for all parties involved—there are distinct differences in how these frameworks operate and are applied.
Introduction to NVCA and BVCA
The NVCA and BVCA templates cover term sheets, investment agreements, and ancillary documents that set out the rights and obligations of investors and founders. While they share a common goal and cover similar core terms, for example preferred equity with liquidation preferences, anti-dilution protection, and board rights, there are notable differences in structure and substance due to differing market norms and underlying corporate laws. Historically, US venture deals (based on NVCA documents) have tended to be somewhat more founder-friendly, in part due to competitive pressures among investors), whereas UK documents evolved from a more private equity-influenced, investor-protective approach. Recent updates to the BVCA models in 2023 have moved them closer to US conventions, for example, eliminating founder personal liability on warranties, echoing the NVCA position.
Background on NVCA and BVCA
The NVCA and BVCA documents reflect the different legal contexts within which each operates. In the UK, the Companies Act 2006 applies and in the US Delaware corporate law applies to most venture financings. In the US, a typical company seeking venture capital is organized as a Delaware C Corporation and in the UK a venture company would be organized as a private company limited by shares.
Delaware corporate law tends to be more flexible and permissive, allowing the agreements to define the deal, whereas English law has more default rules that must be navigated or overridden by specific provisions. Consequently, BVCA model documents often explicitly disapply or handle statutory provisions whereas the NVCA documents add provisions by agreement among the parties.
(i) Share Capital and Constitutional Documents: A Delaware corporation’s key governing document is its Certificate of Incorporation (COI), which is publicly filed, and its Bylaws, which are not publicly filed and maintained by the company. A UK company’s key governing document is its Articles of Association (“Articles”). NVCA model deals require substantially amending the COI to create a new series of Preferred Stock to issue to investors with the agreed rights. BVCA documents in the UK require adopting new Articles that set out the rights of the new class of preferred shares. In Delaware, if authorized in the certificate, the board can often create new series of preferred without a separate shareholder vote, although if the COI needs to be amended (for example to increase the authorized stock to allow for issuance of the preferred stock), shareholder approval would be required. In the UK, creating a new class of shares or altering rights generally needs a special resolution of shareholders (usually obtained at closing with 75% approval) to adopt new Articles containing those rights.
(ii) Fiduciary Duties and Minority Protections: Delaware law provides that directors owe fiduciary duties to the corporation and in certain cases its stockholders, but there is relatively little statutory minority shareholder protection. In UK deals, the BVCA documentation builds in specific protections, like the reserved matters and consent rights, to contractually safeguard investors beyond what company law would default to.
(iii) Amendments to Constitutional Documents: In Delaware, the COI can typically be amended by a majority stockholder vote and the board’s approval, except where a class of shares is adversely affected, in which case that class must separately approve the amendment. In the UK, the Articles can be amended by a 75% shareholder vote (special resolution) and, unless otherwise agreed, that could also include changing the rights of a particular class of stock. To prevent that, BVCA Articles include class consent requirements (variation of rights) mirroring what an NVCA term sheet would demand, namely that as long as any Preferred A Shares exist, the company cannot amend the Articles in a way that varies their rights without a specified percentage of that class approving.
(iv) Legal Enforcement and Remedies: Delaware has a dedicated Court of Chancery that is experienced in handling corporate disputes, and NVCA agreements often specify Delaware law and venue for resolving disputes. English law governs BVCA documents, with English courts (or sometimes arbitration) as the forum. It is rare, however, for VC disputes to be litigated in court or arbitration.
Basic Documentation Structure NVCA and BVCA
UK: In the UK, a venture financing is typically documented with a Subscription Agreement (SA) covering the investment mechanics, Shareholders’ Agreement (SHA) covering ongoing rights, along with updated Articles and a Disclosure Letter, and an optional Registration Agreement. These documents together contain all the investment terms, corporate governance arrangements, and rights of the parties.
US: US deals use multiple specialized agreements:
- A Stock Purchase Agreement (SPA) for the sale of shares, with attached Disclosure Schedules or “Schedule of Exceptions” to the representations and warranties;
- An amended and restated Certificate of Incorporation setting out the preferred stock rights; and
- Ancillary agreements like an Investors’ Rights Agreement, Right of First Refusal and Co-Sale Agreement, Voting Agreement, a Registration Rights Agreement, and updated Bylaws.
Representations and Warranties NVCA and BVCA
UK: In UK deals, the company (and until recently the founders) give a detailed set of warranties about the business in the SA, which are subject to disclosures in a separate Disclosure Letter. The Disclosure Letter will list general disclosures (matters deemed within investors’ knowledge, such as public filings) and specific disclosures that carve-out or qualify the warranties. It is customary in the UK to negotiate liability caps, time limits, and other procedures for warranty breaches (limitations on claims), much like in an M&A transaction, although it is rare for an investor to sue for breach of warranty. The BVCA’s latest model no longer requires founders to give warranties in the SA, aligning with the U.S. approach.
US: US NVCA documents include a representations and warranties section in the SPA that is generally given only by the company, not the founders. All statements are treated as representations (allowing investors to rely on them) but are qualified by a Schedule of Exceptions within the SPA rather than a separate letter. NVCA model docs tend to be silent on detailed claim mechanics or indemnities for breach of representations that you would typically find a US M&A transaction. US VCs, somewhat pragmatically, view representations and warranties primarily as a tool to force full disclosure upfront to inform their investment decision, not as a means for post-closing recourse except in egregious cases of fraud.
Economic Terms of NVCA and BVCA
Both NVCA and BVCA model term sheets set out similar economic terms, including the pre-money valuation, the class of Preferred Shares/Stock to be issued, liquidation preferences, dividends, and anti-dilution provisions.
(i) Liquidation Preference: US and UK models both typically default to a 1x non-participating liquidation preference, i.e. the investor gets 1x their money back or converts to common if that yields more, unless otherwise negotiated. Participating preferred, where investors take their preference and share in the residual amount, is less commonly used.
(ii) Dividends: The BVCA model often provides for a cumulative dividend on preferred shares commonly at some percentage, accruing until an exit. This means if an exit occurs, investors may get their accrued dividends on top of the 1x preference. Under UK law, those dividends generally accrue rather than being paid out annually since actual payment requires profits available for distribution. In the US, NVCA deals frequently use non-cumulative dividends (payable only if declared by the board, which rarely happens at a startup) so that US investors usually only expect their liquidation preference amount, not a growing dividend, unless negotiated otherwise.
(iii) Anti-Dilution: Both NVCA and BVCA documents include anti-dilution protection for investors in the event of down-round financings. The protection is commonly a weighted-average adjustment to the conversion price of the preferred shares (broad-based weighted average is the NVCA norm). Full ratchet, which is somewhat punitive and heavily favors investors, is generally disfavored in London and Silicon Valley, except potentially in distressed situations. The BVCA’s 2023 revisions refined the weighted-average anti-dilution formulas bringing them in line with typical NVCA-style calculations.
Financing Process of NVCA and BVCA
UK rounds may involve more upfront formalities at closing, for example a board meeting and shareholder resolutions to approve the issuance, disapply preemption rights, adopt new articles, etc., per Companies Act 2006 requirements. The US process is more streamlined. In the US, once the board and investors sign the agreements, the new Certificate of Incorporation is filed in Delaware and the shares are issued by board authority. Shareholder approval may not be needed if within authorized share capital and preferences are set out.
- Board Composition and Voting: Both NVCA and BVCA model documents provide mechanisms for investors to obtain board representation and to influence key decisions, but they implement this in slightly different ways. US NVCA deals often include a Voting Agreement where stock classes agree on the composition of the Board of Directors, for example, specifying that common shareholders (founders) elect X directors, preferred shareholders elect Y directors, and perhaps one independent director agreed by both. In a typical Series A, this might mean the lead investor gets one board seat, founders/common get one or two, and maybe an independent or third party seat, aiming for an odd number board. The BVCA SHA similarly will stipulate the right of key investors to appoint a director or an observer to the board.
- Protective Provisions / Reserved Matters: One of the more significant negotiations in venture deals concerns how much control the investors will gain in operational decisions affecting the company. Both NVCA and BVCA models include a list of important corporate actions that cannot be undertaken without investor consent, referred to as protective provisions or reserved matters. These give investors a veto over certain decisions, for example issuing new shares, altering rights of shares, incurring significant debt, changing key business scope, or selling the company. UK deals tend to have a more extensive list of reserved matters written into the SHA and/or Articles, including mid-level management decisions. The NVCA model’s protective provisions, typically in the Certificate of Incorporation or Investor Rights Agreement, also restrict major changes but generally focus on high-level actions, such as changes to share capital, mergers, amendments to charter, and dividend payments, relying on the board’s broad powers for day-to-day matters.
- Preemption Rights on New Issues: The UK and US provide that existing investors can maintain their ownership percentage in future rounds. In the UK, under the Companies Act 2006, shareholders have a statutory preemption right on new issuances of shares for cash. New shares must first be offered to existing shareholders pro rata, unless those rights are disapplied by a shareholder resolution. In venture deals, the investors and other shareholders often agree to disapply statutory preemption for the purpose of that financing and usually generally for future issuances, subject to agreed contractual rights. Instead, the BVCA model will include contractual preemption clauses in the SHA or Articles giving investors, and often all major shareholders, the right to participate in future funding rounds pro rata.
Delaware law, which applies in US venture deals, does not automatically give shareholders antidilution subscription rights. Therefore, in the US, it is customary to provide a contractual right of first offer/first refusal on new share issuances to the investors, which functions similarly to UK preemption rights.
Transfer of Shares, ROFR, Co-Sale (Tag-along), and Drag-along NVCA and BVCA
Both NVCA and BVCA models impose restrictions on transfers of shares by founders and other key shareholders to avoid an unwanted new shareholder. Typically, any proposed transfer by a significant holder must first be offered to the existing shareholders and/or the company (Right of First Refusal or “ROFR”), and investors often get a co-sale or tag-along right to join in if a founder or major holder sells their shares. The NVCA has a standalone ROFR and Co-Sale Agreement while the BVCA includes these provisions in the SHA. Both usually carve-out certain permitted transfers, such as estate planning transfers, affiliate transfers, incentive plan transfers, or transfers of small amounts, that do not trigger tag-along rights.
Additionally, drag-along rights, forcing minority shareholders to sell upon a major investor-approved exit, which avoids a minority holdout, appear in both NVCA and BVCA documents, though often structured a bit differently. The BVCA documents typically have drag-along provisions in the SHA and repeated in the Articles, often requiring a specified majority of both investors and sometimes overall shareholders to invoke a drag-along. The NVCA documents include drag-along terms usually in the Voting Agreement, binding all stockholders to vote in favor of an exit transaction if it meets certain approvals.
Information Rights: Both NVCA and BVCA documents give investors rights to receive company information, including periodic (monthly/quarterly/annyual) financial statements, budgets, and inspection rights. In the NVCA documents, the information rights are set out in a separate Investor Rights Agreements where major investors, above a threshold, get annual audited financials, quarterly or monthly management accounts, and the right to visit and discuss the company’s affairs. In the BVCA documents, the rights are set out in the SHA, which includes undertakings to deliver audited accounts, periodic management reports, and other information. In both cases, such rights are typically lost once the investor holds below a certain percentage or after an IPO
Founder Vesting and Good Leaver/Bad Leaver Provisions NVCA and BVCA
A critical governance aspect is how founder equity is handled if founders or key team members leave the company early and therefore are no longer contributing to the growth of the company before it reaches an exit or IPO. The US and UK approaches differ here, with the US focusing on a time-vesting concept and the UK focusing on the cause of departure, although the approaches are beginning to converge.
US: In the US, it is standard for founders to be on a vesting schedule for their stock post-investment, if not already. NVCA term sheets often require that founders’ existing shares become subject to repurchase by the company, lapsing over 3 to 4 years, which is negotiable, so if a founder leaves early, the company, or remaining shareholders, can buy back the unvested portion at nominal cost, while the departing founder keeps the vested portion.
UK: In the UK, traditional venture deals have used a “Good Leaver/Bad Leaver” concept. A Bad Leaver (a founder who resigns without “good reason” or is fired for “cause”) can be forced to sell all or most of their shares back to the company or to other shareholders, often at nominal value if leaving early or for cause. A Good Leaver (leaving due to death, disability, or being dismissed without cause) may get to keep their vested shares or sell them at fair market value and relinquish the unvested shares for nominal value.
Restrictive Covenants (Non-Compete, Non-Solicitation) NVCA and BVCA
Another governance/control element is whether investors require founders to sign up to non-compete and non-solicitation covenants. BVCA documents commonly include restrictive covenants on founders and key executives, either in the SHA or, more often, in the founders’ employment/service contracts, which are often updated at closing. It is typical for BVCA-style agreements to have the founders promise not to compete with the company’s business or poach employees/customers for a certain period post-departure, often one to two years, which must be reasonable in scope to be enforceable. New employment agreements may be required, containing these covenants which run in favor of the company.
In the US, non-competes are far less frequently included in venture deals, notably because in some states, for example, California, home to many startups, post-employment non-compete covenants are unenforceable except in the context of the sale of a business. Furthermore, the trend is towards non-competes becoming unenforceable in other states, both to favor the right of employees to work anywhere and because entrepreneurs have complained that non-compete covenants restrict the free movement of employees, and therefore innovation. NVCA model documents do not typically include a broad non-compete on founders, beyond a limited non-solicitation of employees and a confidentiality/IP assignment agreement. Investors rely on the fact that a founder who leaves and competes will lose unvested equity as noted above.
Other Investor Rights NVCA and BVCA
- Registration Rights: Both NVCA and BVCA documents cover additional rights like registration rights, which give investors the ability to force or join in a public offering (IPO) of shares in the future. In the US, registration rights are a standard feature, documented in the NVCA model Registration Rights Agreement, because in a NASDAQ/NYSE IPO, underwriters often only take a subset of shares or there may be follow-on offerings; investors want the right to include their shares in a registration once the company is public. The BVCA has recently adopted a Registration Rights Agreement that reflects the US terms, which may be used, for example if a future offering in the US is contemplated.
- Redemption Rights: Redemption rights, i.e. the right of investors to compel the company to repurchase their shares after a certain date, are sometimes seen in US charters (the NVCA model includes an optional redemption right after, for example, 5 years). These are rarely exercised as a startup rarely has the cash to redeem or can meet the corporate law statutory tests for redemption. Furthermore, a redemption could affect the availability of the tax benefits of QSBS (see below).
In the UK, redemption rights for venture investors are not very common, in part because of legal constraints since a UK company can only redeem shares out of distributable profits or a fresh cash raise, and offering a guaranteed exit could violate “full risk” requirements for any EIS shares.
Equity Incentives and Employee Equity Grants NVCA and BVCA
Equity incentives for employees and founders are crucial in startup fundraising to attract talent, particularly as cash compensation may be below market. Both NVCA and BVCA documents address the creation and maintenance of employee option pools or share incentive plans. Typically, term sheets in both jurisdictions will specify an option pool (employee equity pool) size as a percentage of the company, often to be created or topped-up pre-money, which has the effect of diluting the founders only, and not the new investors. The legal documents then provide for the reservation of that pool. For example, the NVCA term sheet may provide for a “10% post-closing option pool”, and the COI will authorize sufficient common stock. The BVCA model term sheet similarly expects a pool for options, sometimes called an EMI option pool in the UK context.
- US Stock Options: In the US, two types of options are used: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). ISOs, which can only be granted to employees, have certain tax advantages, including no tax on exercise and potential capital gains treatment on sale, but are subject to tax-based limitations and complex rules, including $100,000 per year vesting limit, holding period requirements, different rules for larger stockholders, and alternative minimum tax issues. NSOs, which are issued to everyone else other than employees (e.g. vendors and independent directors) are simpler but when exercised, the spread is taxable as ordinary income. Further, if certain employee limits are exceeded for ISOs, the balance of the options would be issued as NSOs.
- UK Stock Options: In the UK, the roughly equivalent distinction is between Enterprise Management Incentive (EMI) options, which are tax-advantaged options for employees of qualifying smaller companies, and non-tax-advantaged options. EMI options are highly beneficial with no tax on grant, no tax on exercise, if the strike price is at least market value, and gains can qualify for a 10% capital gains tax rate (Business Asset Disposal Relief) if certain conditions are met. The BVCA model documents typically assume that the company will implement an EMI Option Plan for UK employees (if eligible) and include definitions or schedules related to such plans. From a drafting perspective, the BVCA SHA might include covenants about maintaining EMI scheme conditions.
Note that for companies operating in both the UK and the US, it would be necessary for the main plan to have a sub plan in the other country to take advantage of the tax benefits in the US and the UK for their respective US and UK employees. For example, a US company may issue ISO options under the main plan in the US and set up a sub plan for UK employees compliant with the EMI scheme or another tax-advantaged UK scheme. Both the NVCA and BVCA documents will require that an option plan or share incentive scheme is adopted. In Delaware, the board typically adopts a Stock Option Plan and related agreements (often prior to the financing, with investor approval if necessary) and the shareholders approve it. In the UK, the company adopts an EMI plan, often with standard rules approved by HMRC to lock in tax treatment.
Tax and Regulatory Considerations NVCA and BVCA
UK: The UK has well-known schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which offer significant tax reliefs to angel and early-stage investors. To qualify, the company and the shares issued must meet certain conditions including that the shares must be “full risk” ordinary shares, not redeemable, and with no preferential rights (except limited preferential dividends). This means if a company wants to secure EIS/SEIS investments, it cannot issue typical preference shares with liquidation preferences or guaranteed returns, as that would void the tax relief. Often, UK startups raise their seed round with EIS/SEIS money on ordinary shares, then issue preferred shares for a later VC round (after the EIS/SEIS shares have been issued). BVCA model documents are often used for those later rounds and assume “preferred” shares with preferences. Founders must be careful to preserve EIS/SEIS status for existing investors if applicable, usually by structuring the new preferred shares as a separate class and not altering the EIS shares’ rights.
US: By contrast, the US offers no directly comparable front-end tax break for investors. Some states have venture capital credits, but federally the main incentive is Qualified Small Business Stock (QSBS) (Section 1202 of the Internal Revenue Code), which can allow investors in C Corporations, the principal type of corporation for venture-funded startups, to exclude a large portion of capital gains on a sale if they held the stock for over 5 years. QSBS applies to the sale of stock of a US C Corporation under certain size limits and involved in covered industries and is relevant at exit rather than at investment. NVCA documents do not need special provisions to qualify for QSBS, but it is often a relevant consideration of the investors.
Regulatory Securities Laws: The securities laws apply to fundraising in the US and the UK. NVCA model documents assume that the venture financing is a private placement exempt from registration, typically relying on Regulation D (Rule 506(b)) in the US or Regulation S for investors outside the US, which has less requirements. Among other requirements for Regulation D, only accredited investors (as defined in the securities laws, but typically investors with a minimum net worth) are participating in the investment and no general solicitation is used. The NVCA SPA contains representations by the company and investors to ensure compliance, including that investors represent they are accredited and purchasing for investment, not for resale.
In the UK, offerings of shares are likewise generally done in reliance on exemptions to avoid a public offering prospectus. The BVCA documents will include warranties from investors that they are sophisticated and do not require a prospectus, and often reference that the investment is for long-term and that investors can bear the risk to satisfy UK financial promotions rules.