TLDR:
- Venture capitalists prefer predictability in contracts with startups.
- Standardized contract models, like the NVCA model, have become widely adopted.
A study by Stanford Graduate School of Business professor Robert Bartlett reveals that the National Venture Capital Association’s model for contracts, introduced in 2003, has become almost universal in VC-startup deals, with 85% of contracts in 2022 following the standardized format, compared to less than 3% in 2004. The standardization of contracts has streamlined the investment process by reducing variations in VC contracts and making the contracting process smoother for investors and startups. Despite the efficiency benefits, there is a potential risk of ossification in the standard model and a challenge in adequately representing startup founders’ interests. Bartlett’s study also highlights the increased complexity in Series A financing and the evolution of startup governance rights. The success of the NVCA model in promoting industry-wide standardization demonstrates how organized efforts can encourage predictability and efficiency in VC investments.
Full Article:
Venture capitalists are renowned for their relentless pursuit of innovation and high-risk ventures. Yet, when it comes to the contracts governing their deals with startups, there’s a surprising paradox — they have a strong preference for predictability. A new study by Robert Bartlett, a professor of finance at Stanford Graduate School of Business, shows how the National Venture Capital Association’s model for contracts, introduced in 2003, has become almost ubiquitous.
In examining nearly 5,000 funding agreements negotiated between VCs and startups over nearly two decades, he found that 85% of contracts in 2022 followed this standardized format, compared to less than 3% in 2004.
“This is consistent with a long-standing theme: Investors don’t want to be spending extra on legal fees so as to optimize their use of capital,” Bartlett says. “With interest rates and inflation high, there will be even more of a focus on anything which can reduce both the time and friction involved in making investments — and using standard financial documents is one of them.”
Bartlett found that after the venture capital industry exploded in the late 1990s and early 2000s, the legal services industry played a crucial role in reducing variations in VC contracts and streamlining the investment process. In 2003, the general counsel of Charles River Ventures gathered around two dozen attorneys to create what came to be collectively known as the NVCA model documents. They included a standard term sheet — the document outlining the key terms and conditions of a potential investment, the starting point for negotiations between VCs and startups — and related financing agreements. These were made freely available on the NVCA website.
Adopting common standards was appealing to VCs, who
