Wednesday, March 27, 2024

Updated Resource for Entrepreneurs and their Lawyers

The National Venture Capital Association (NVCA) sets the standards, quite literally, on the forms used by most emerging businesses looking to raise capital. Founded in 1973, the NVCA is a research, advocacy, and professional development network—a non-profit organization supporting the venture capital industry and the various players that make up the community.

Last fall, the NVCA updated its primary document stack used in most venture capital transactions, the twelfth time since 2003. These documents include forms of an amended and restated certificate of incorporation, a stock purchase agreement, a right of first refusal and co-sale agreement, an investors’ rights agreement, and a voting agreement. The model forms confer many benefits. In addition to saving drafting time, these forms, with their “best in class” terms, simply make negotiating documents easier.

While boilerplate language in legal agreements is maybe not everyone’s idea of provocative bedtime reading, I have been fascinated by the updates and suggested provisions that both reflect and drive industry practice. For example, in the investor’s rights agreement, the form now provides guidance on diversity, equity and inclusion (DEI) policies:

[Company shall [use commercially reasonable efforts to adopt within [90] days following the date hereof] [and thereafter] maintain written policies, processes and procedures applicable to the Board of Directors and the Company to promote diversity, equity, inclusion and responsible governance. The Company shall use commercially reasonable efforts to interview at least one person who self-identifies as a member of a currently underrepresented population (e.g., race, gender, ethnicity, sexual orientation or disability) within the Company for each open executive-level employment position and each vacant independent director seat on the Board of Directors, if and when such a seat exists and to the extent permitted by the Voting Agreement.]

Additionally, the NVCA tackles the thorny issues that generative AI may bring to the intellectual property rights that are inherent in most venture capital deals. The stock purchase agreement suggests:

[Generative AI.

(i) The Company uses all Generative AI Tools (as defined below) in [material] compliance with the applicable license terms, consents, agreements and laws.
(ii) The Company has not included and does not include any sensitive Personal Information, trade secrets or material confidential or proprietary information of the Company, or of any third Person under an obligation of confidentiality by the Company, in any prompts or inputs into any Generative AI Tools, except in cases where such Generative AI Tools do not use such information, prompts or services to train the machine learning or algorithm of such tools or improve the services related to such tools.

(iii) The Company has not used Generative AI Tools to develop any material Company-Controlled Intellectual Property that the Company intended to maintain as proprietary in a manner that it believes would materially affect the Company’s ownership or rights therein. (emphasis added)

(iv) For purposes hereof, “Generative AI Tools” means generative artificial intelligence technology or similar tools capable of automatically producing various types of content (such as source code, text, images, audio, and synthetic data) based on user-supplied prompts.]

As the NVCA itself noted in its release, in addition to updates to the Delaware General Corporation Law (DGCL) and recent case law, the updates reflect evolving norms and provide additional guidance on topics including not just DEI policies and the use of generative AI, but also direct listings and trade and economic sanctions. By addressing these topics, the NVCA forms provide a starting point that brings early-stage to mid-stage businesses together with capital investors and private equity firms driving expectations around the shared language that make successful capital campaigns possible. All the more reason to read the fine print!

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