Over the past two decades, the globalization of the start-up and venture capital (VC) ecosystems beyond Silicon Valley has led to new technology and finance hubs emerging across the globe. As these ecosystems developed, VC investment terms have been influenced by the United States’ National Venture Capital Association model agreements (NVCA), along with other US market terms. Given the unique characteristics of each market, terms used in local markets have at times leveraged on, or diverged from, those key terms in the US, and certain jurisdictions have adopted their own standardized investment agreements. In particular, the US NVCA has its counterpart in the United Kingdom, being the British Private Equity & Venture Capital Association model documents (BVCA); in Singapore, the Venture Capital Investment Model Agreements (VIMA) have been developed by the Singapore Academy of Law and Singapore Venture and Private Capital Association to streamline VC investments in Southeast Asia.
As an international law firm known for its broad international footprint, deep technology experience, and strong emerging company and venture capital (ECVC) practice, Morrison Foerster has played a meaningful role in leveraging its US ECVC experience to emerging markets around the world. Based on our deep transactional experience across the globe, this MoFo report compares eight key VC investment terms from the latest US NVCA (updated in October 2023), UK BVCA (updated in February 2023) and Singapore’s VIMA 2.0 (updated in September 2022), and against their respective local market positions. In addition, this report also compares how these eight terms are differently positioned in other key markets, including Mainland China, Hong Kong, Japan, India, Israel, Germany and Latin America.
As the start-up and VC ecosystems are becoming increasingly global, both entrepreneurs and investors would be well-served to develop a more nuanced view of how market positions for these key terms differ in tech and finance hotspots across the globe.
- The US market continues to be characterized by more founder-favorable terms compared to other jurisdictions due to strong competition over tech and talent.
- The Latin American ecosystem is highly leveraged on the NVCA, but has demonstrated enhanced focus on protective provisions in the course of regional adaption.
- Investors in the Israeli market are also more amenable to accept company/founder-friendly terms in pursuing tech and talent.
- In contrast, Asia generally provides more investor-friendly terms, particularly in the Mainland China market. Investors tend to negotiate redemptions rights and require more veto powers, even on granular operational matters. Investors in the Mainland China and Japan market share common themes in prioritizing downside protection by way of greater than 1x end liquidation preference and participation on the back end, such that in a deemed liquidation event (a sale of the company), investors can recover more than what they invested upfront, before sharing the remaining proceeds with ordinary shareholders. Meanwhile, there is a somewhat less rigid definition of “market” terms in India allowing more flexibility in negotiating terms.
- The European markets (the UK and Germany), on the other hand, have taken a more balanced approach. The UK’s BVCA have traditionally been viewed as a neutral draft, but they have been updated in February 2023 to address the increasing influence of US VCs. Under the BVCA, founders are no longer liable for warranty breaches, which echoes the NVCA position. Regulations also play a significant part in shaping VC terms. For example, there are statutory Pre-emptive Rights for all shareholders in German companies; such rights are rarely agreed by contract in other markets.
In Section 1 of this report, we will explore the following eight key terms in 10 different jurisdictions, as well as other important or interesting observations. The jurisdictions are color-coded to indicate where they are positioned on the spectrum.
The eight key terms which we elaborated in this report include:
- Founders’ Personal Liability for Representations and Warranties
- Redemption Rights
- Anti-dilution Adjustments
- Protective Provisions
- Shareholder Protective Provisions
- Board Protective Provisions / “Backdoor” Protective Provisions
- Restrictions on Transfer
- Restrictions on transfers: Founders and Key Management Shareholders
- Pre-IPO Lock-up on Investors
- ROFR/Co-Sale
- Liquidation Preference
- Pre-emptive Rights
In Section 2, we have included some key takeaways for the 10 jurisdictions discussed.
Should you have any questions, please reach out to our key contacts or global contributors listed below. A pdf version of this report is also available for download.
