TLDR:
- Standardization of VC contracts has become more common since 2003, leading to more complex capital structures in startups.
- NVCA model documents have been widely adopted by law firms, benefiting both companies and lawyers in the VC industry.
In a recent paper by Stanford’s Robert Bartlett, it was revealed that the standardization of early-stage VC contracts has increased significantly since 2003, while capital structures in startups have become more intricate. The National Venture Capital Association’s model term sheet and financing agreements from 2003 have become the industry standard, making legal work for early-stage startups more efficient and allowing for the development of more complex financing structures.
The study, based on an analysis of almost 5,000 charters issued in connection with startup Series A financing between 2004 and 2022, found that the use of the NVCA model form rose from under 3% to 85% over the years. This standardization has benefited law firms like Wilson Sonsini Goodrich & Rosati PC and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, among others, who have adopted a firmwide policy of using the NVCA model.
Furthermore, as VC documents have standardized, the complexity of startup capital structures has increased due to the emergence of seed-round financing before the Series A round. The rise in VC financing over the past generation has allowed dominant law firms to retain their position in VC finance while providing opportunities for new entrants in the industry.
Despite the standardization, founder-friendly provisions like dual-class common stock and founder preferred stock remain uncommon in early-stage companies. Law firms have accepted standardization in VC work, which is a lower-margin practice compared to other legal areas like M&A.
