Aaron Archer, a partner at law firm Cooley
The U.K. attracted $31 billion in VC investment last year, with much of that capital flowing in from U.S. investors. Indeed, according to figures published by Dealroom, American VCs have been pumping more money into the ecosystem than their domestic counterparts since 2021. It is a significant change that has the potential to affect how deals are done in Britain.
Witness a recent announcement from the British Private Equity and Venture Capital Association (BVCA). The organization has revised its model documents for Series A funding rounds with the intention of making investment faster and more cost-effective. The presence of foreign investors in the market has been a factor in driving change.
So what does this mean in practice?
Aaron Archer is a partner at global law firm Cooley and along with his colleague Ryan Naftulin he was involved in the process of drawing up the new documents. As he sees it, the revisions reflect the changing requirements of Britain’s investment landscape.
“We are seeing a ton of U.S. investment coming in. They bring with them questions and thoughts around how they are used to doing things.”
As Archer explains, investors from North America are accustomed to using documentation models drawn up by the NVCA in the 2000s. The aim was and is to provide basic contract templates that could be applied to a wide range of investments without lawyers having to start from scratch every time, slowing down dealmaking in the process. And while Britain’s BVCA created similar documentation, Archer says there was a feeling they had become outdated. “They weren’t really reflecting how investment is done today in the UK,” he says.
A Changed Picture
So what has changed? Well aside from more foreign investors coming into the market, Archer says deals have become more complex. Rather than just one or two investors, a company might attract a wide range of investors, including angels and VCs coming in at different times. Archer says the BVCA’s standard documents hadn’t really kept pace with this growing complexity. Hence the need for change.
He cites the example of the completion of a funding round. Back in 2015, he says, most Series A rounds involved one or two investors. Today there may be more and that raises questions about when the round is complete. Previous standard documents haven’t made that clear. Thus, when multiple investors are involved, a lot of work needs to be done on the contract. The updated document models seek to remedy that situation.
The new documentation has also split the Subscription Agreement, Shareholders Agreement and Articles of Association into three separate contracts, making it easier to alter them between funding rounds. For instance, the Shareholders’ Agreement could be altered without touching the Subscriptions agreement.
Bringing In New Shareholders
There is also new thinking around the right of existing shareholders to have first refusal when new shares are issued In companies where shares are owned by a mix of friends and family, angels, and VCs, if everyone insists on their right to buy new shares on a pro-rata basis, it can be difficult to bring new investors in. “When it comes to new funding rounds, people need to think about the fact that getting in a new investor brings in so much additional value,” says Archer. Thus, there is a need for contractual models that don’t slow down or kill the chances of another round taking place with fresh investor faces.
So the new documents contain the concept of “major investors” who can make decisions on the application of pre-emption rights.
Faster Decision Making
For company owners, that probably sounds rather arcane, but the BVCA has also sought to help founders, not least in terms of decision-making. Once a company takes investment, the decision-making process is split between the founders, majority shareholders and investor directors. There are usually a lot of rules stipulating when a founder needs permission. “That can mean decisions are made more slowly,” says Archer. “And when decisions are made more slowly, the company doesn’t scale at the pace they want to.”
So, one of the aims of the new documents is to provide a means to introduce more clarity around the decision making process and when investor consents are needed. “We’ve tied it up and made it a lot clearer,” says Archer.
Also potentially beneficial for original owners are new contractual models governing the departure of founders and what happens to their shares. So-called “bad leavers” can lose everything. Provisions in the new documents make this less likely – for example a departure due to poor performance wouldn’t mean a loss of shares. However, founders might well lose voting rights if they are no longer managers.
It’s important to say that none of the above affects company law. The documents are there to be used by VCs, law firms and founders as the basis for contractual agreements if they so choose. They can also be ignored. The BVCA hopes they will be adopted, but it’s early days.
But do the changes amount to anything more than an arcane exercise. Well, in one sense, they may help align the U.K. ecosystem with the U.S. – something that will make American investors feel more at home. Archer says they should also lead to faster and more cost-efficient deal-making and better decisioning. Whether this happens will depend on adoption.
