Key Takeaways

  • Venture capital transactions require multiple legal and business documents to protect both startups and investors.
  • Core agreements include stock purchase agreements, voting agreements, rights of first refusal, investors’ rights agreements, and subscription agreements.
  • Foundational corporate documents like the certificate of incorporation, articles of association, and term sheets define governance, stock rights, and investment terms.
  • Additional documents required for venture capital funding often include financial statements, business plans, cap tables, disclosure schedules, and due diligence reports.
  • Closing documents such as board consents, legal opinions, and compliance certificates are necessary to finalize funding rounds.
  • Standardization of venture capital legal documents is increasingly common, which streamlines negotiations and reduces legal costs.

Venture capital legal documents aren't necessarily consistent from one instance to another. However, when it comes to the industry, it's becoming more standard to use various documents.

Different Documents in Venture Capital

Venture capital is still a relatively young industry. However, it's still a legitimate one that's enjoying more standards and patterns. One area that's trending toward consistency is documentation.

In the past, a venture fund's counsel and a startup company's lawyer may have negotiated terms. Groups associated with the venture capital industry have attempted to create standardized documents.

Business and Financial Documents

Beyond legal agreements, investors expect startups to provide supporting business and financial documents that demonstrate the company’s readiness for funding. These typically include:

  • Business plan or pitch deck – A clear outline of the company’s mission, business model, and growth strategy.
  • Financial statements – Historical and projected financials, including balance sheets, income statements, and cash flow reports.
  • Cap table – A record of all shareholders, ownership percentages, and outstanding equity instruments.
  • Market analysis and customer traction data – Evidence that the startup understands its target market and has early signs of growth.
  • Due diligence package – Documentation on intellectual property, contracts, compliance, and key risks for investor review.

These documents allow investors to assess the company’s profitability potential, valuation, and risk factors before committing capital.

Agreements

Stock purchase agreement

This agreement includes the purchase terms and sale of the stock to the investors. This stock purchase agreement is similar to one in an M&A context since it usually contains the following:

  • Purchase price
  • Warranties and representations from investors and the company
  • Conditions to closing

The agreement outlines the terms and conditions upon which an individual buys company shares.

Voting agreement

The shareholders come to a voting agreement. Usually, it has provisions that relate to a company's control and management. It covers how the board is chosen as well as regulations over the size of the board.

Right of first refusal/co-sale agreement

The founders and possibly some or all of the current shareholders agree on a right of first refusal. This states that founders and shareholders (where applicable) will not sell their shares without giving investors, and sometimes the company, the right to purchase those shares.

Investors' rights agreement

There may be a wide range of provisions in an investors' rights agreement, such as information rights. These rights outline how to share certain information about the company with the shareholders. Information may be financial, and it might only be shared with shareholders who own a certain threshold of shares, such as 10 percent or more.

The provisions may be used to determine corresponding provisions for subsequent funding rounds. Shareholders' rights are also detailed in this agreement, particularly with respect to minority investors and the rights they hold.

In general, the agreement may set out the following:

  • Requirements for reporting and financial disclosures
  • Observer rights
  • Procedures for inspecting the company or indicating concerns

Subscription agreement

A subscription agreement often has details of the investment round, such as the following:

  • Payment terms
  • Number and class of shares
  • Warranties and representations about a company's condition
  • Milestones

Warranties and representations are qualified in a disclosure letter. Also, supporting documents explicitly set out any issues that the founders believe to be important to investors before the investment is completed.

Other Documents

Closing and Compliance Documents

In addition to incorporation papers and term sheets, venture capital funding rounds often require a set of closing and compliance documents to complete the investment. Common examples include:

  • Board consents and resolutions – Authorizing the issuance of new shares and approval of financing terms.
  • Legal opinion letters – Issued by company counsel confirming the validity of the shares and compliance with securities laws.
  • Officer or secretary certificates – Confirming the accuracy of company records and resolutions.
  • Disclosure schedules – Detailed attachments to agreements listing exceptions, liabilities, or risks not covered in warranties.
  • Regulatory filings – Such as securities compliance notices filed with relevant authorities.

These documents provide assurance to investors that the company has complied with corporate governance and securities requirements, reducing the likelihood of disputes after funding.

Certificate of Incorporation

Along with the basic information included in a Certificate of Incorporation, such as a company's name and the classes of stock it can issue, the Certificate usually includes a description of this stock as well. The description often addresses the following pertaining to a company's class and series of stock:

  • Rights
  • Privileges
  • Preferences
  • Restrictions

Term sheet

Term sheets outline a proposed investment's key financial terms along with other terms. Terms may include the following:

  • The size of an investment
  • The financial instruments that will be used
  • The valuation placed on a company

Parties must come to an agreement. Once that happens, drafting investment documents is based on the term sheet. In most cases, a term sheet's provisions aren't legally binding, except for clauses relating to exclusivity, costs, and confidentiality.

The terms of an investment are often conditional upon successfully completing due diligence about financial, commercial, and technical aspects.

A term sheet states terms under which someone agrees to invest, including the following considerations:

  • Corporate governance
  • Financial structure
  • Liquidation

Articles of Association

The Articles include the following:

  • The rights associated with various share classes
  • The procedures for issuing and transferring shares
  • Procedures for holding board and shareholder meetings

The Articles of Association may contain some of the same protective provisions found in the shareholders agreement, and they may be repeated here.

Various groups in the venture capital industry are working toward standard legal documents across the field. This can be very helpful for investors and the companies they invest in. Having a standardized system can keep everyone on the same page regarding rights and agreements, which can make this relatively young industry a stronger one.

Frequently Asked Questions

1. What documents are most important for venture capital funding?

The most critical documents include stock purchase agreements, term sheets, articles of association, financial statements, and cap tables.

2. Do startups need both legal agreements and financial records?

Yes. Legal agreements protect investor rights, while financial and business records demonstrate the startup’s viability and growth potential.

3. What is included in a venture capital term sheet?

A term sheet outlines investment size, valuation, liquidation preferences, governance rights, and conditions for closing.

4. Are closing documents necessary in every funding round?

Yes. Closing documents like board consents, legal opinions, and compliance filings ensure the transaction is legally valid and enforceable.

5. Can standard venture capital documents be customized?

Absolutely. While many documents follow standard templates, they are often tailored to the specific needs of the investors and the company.

If you need help with venture capital legal documents, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.