Britain’s BVCA Responds To The Expectations Of Overseas VCs

The UK attracted $31 billion in venture capital investment last year, with much of that capital coming from US investors. In fact, according to figures published by Dealroom, US VCs have been injecting more money into the ecosystem than their domestic counterparts since 2021. It’s a significant shift that could impact the way deals are made in the UK .

Witness a recent announcement from the British Private Equity and Venture Capital Association (BVCA). The organization has revised its model documents for Series A financing rounds with the intention of making investment faster and more profitable. The presence of foreign investors in the market has been a driving factor for change.

So what does this mean in practice?

Aaron Archer is a partner at the global law firm Cooley and, along with his colleague Ryan Naftulin, participated in the process of drafting the new documents. According to him, the revisions reflect the changing requirements of the UK investment landscape.

“We’re seeing a lot of American investment coming in. They’re bringing questions and reflections about how they’re used to doing things.”

As Archer explains, investors in North America are accustomed to using documentation models developed by the NVCA in the 2000s. The goal was and is to provide basic contract templates that could be applied to a wide range of investments without that lawyers have to start from scratch every time, slowing down the negotiation in the process. And while Britain’s BVCA created similar documentation, Archer says there was a feeling they had become obsolete. “They didn’t really reflect how investment is done in the UK today,” he says.

A changed image

So what has changed? Aside from more foreign investors coming into the market, Archer says deals have become more complex. Instead of one or two investors, a company can attract a wide range of investors, including angels and VCs who arrive at different times. Archer says the BVCA’s standard documents had not really kept pace with this growing complexity. Hence the need for change.

Cite the example of closing a funding round. In 2015, he says, most Series A rounds involved one or two investors. There may be more today and that raises questions about when the round will end. Previous standards documents have not made this clear. Therefore, when several investors are involved, a lot of work has to be done on the contract. The updated document models aim to remedy this situation.

The new filing has also split the underwriting agreement, shareholders’ agreement and bylaws into three separate contracts, making it easier to modify them between funding rounds. For example, the Shareholders’ Agreement could be altered without touching the subscription agreement.

Recruitment of new shareholders

There is also new thinking about the right of existing shareholders to have preference 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 a proportionally, it may be difficult to attract new investors. “When it comes to new rounds of funding, people have to think about the fact that getting a new investor brings so much additional value,” says Archer. , there is a need for contractual models that do not slow down or kill the chances of another round with new investor faces.

Thus, the new documents contain the concept of “large investors” who can make decisions about the application of pre-emptive rights.

Faster decision making

For business owners, this probably sounds pretty arcane, but the BVCA has also tried to help founders, especially when it comes to decision-making. Once a company invests, the decision-making process is divided between the founders, the majority shareholders and the principal investors. There are usually many rules that stipulate when a founder needs permission. “This can mean that decisions are made more slowly,” says Archer. “And when decisions are made more slowly, the company doesn’t scale at the rate it wants to.”

So one of the aims of the new documents is to provide a means of introducing more clarity into the decision-making process and when investor consents are required. “We’ve tied it up and made it much clearer,” says Archer.

Also potentially beneficial to the original owners are new contractual models that regulate the exit of founders and what happens to their shares. The so-called “bad leavers” can lose everything. Provisions in the new documents make this less likely; for example, an exit due to poor performance would not mean a loss of shares. However, founders may lose voting rights if they are no longer managers.

It is 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 a basis for contractual agreements if they so choose. They can also be ignored. The BVCA hopes they will be adopted, but it is early days.

But are the changes more than an arcane exercise? Well, in a sense, they can help align the UK ecosystem with the US, which will make US investors feel more at home. Archer says they should also lead to faster, more cost-effective deal-making and better decision-making. Whether that happens will depend on adoption.