Over the years, two standard sets of documents have emerged as starting points for a Series Seed equity financing: the National Venture Capital Association’s (NVCA) docs and the Series Seed Docs. Both sets are well-drafted and battle-tested, but they differ from each other.
That being said, the seed round is often the first equity financing (sometimes called a “priced round”) which means that it’s the first round where the startup is selling preferred shares in its company at a set valuation. Generally all previous convertible securities convert at the seed round, and the holders of those securities will be issued their promised shares.
Before comparing the two sets of documents, note that some seed rounds are raised using Simple Agreement for Future Equity (SAFEs). Although SAFEs are typically used in pre-seed, angel and friends-and-family rounds, they can be used for a seed round if both the investor and founders agree. If a SAFE is used in the seed round, it would be the last round where SAFEs are used. It is highly unlikely for a Series A to be raised using a SAFE.
If you want to learn more about the different stages of funding, click here.
The NVCA Docs Origin Story
The NVCA is a trade association that represents the venture capital industry in the United States. In the early days of venture capital, there was no standard set of documents that were used for equity financing. Instead, each deal was negotiated individually, which made the process time-consuming and expensive. To address this issue, the NVCA created a set of model legal documents in the mid-1990s. These documents were intended to provide a starting point for negotiations between startups and venture capitalists, and to streamline the process of equity financing.
The documents have evolved over time, with major updates in 2003 and 2014. These documents were intended to reflect changes in the startup ecosystem, including the rise of seed-stage investing and the increasing use of convertible notes and SAFEs. These updates included provisions for anti-dilution protection, drag-along rights and co-sale rights, which had become standard in the industry.
Today, the NVCA model documents continue to be widely used in the venture capital industry. While they are not mandatory, most venture capital firms and startups use them as a starting point for negotiations.
The NVCA model documents are designed to be flexible and to allow for customization based on the specific needs of each deal. They are intended to provide a common language and framework for equity financing, while still allowing for individual negotiation and customization. They have helped to streamline the process of equity financing and to provide a common language and framework for negotiations.
The Series Seed Docs Origin Story
Originally, venture capital investment packages consisted of five documents that were about 100 pages long. These were impractical for early-stage startups raising relatively small amounts of money. The Series Seed startup funding documents were created to address this.
The Series Seed Docs were curated in 2010 by Ted Wang, a partner at Fenwick & West. They provide a simpler, shorter version of the full set of documents used in Series A equity financing. The three essential documents required to close Series Seed equity financing are the term sheet, stock investment agreement and certificate of incorporation. These documents are flexible and can be customized based on the specific needs of each deal.
The Series Seed Docs have evolved over the years to reflect changes in the startup ecosystem. They now include provisions for convertible debt financing, which has become more common in recent years. The documents also include additional information that may be necessary for fundraising rounds, such as subscription agreements and stockholder agreements.
Today, the Series Seed Docs are widely used in the startup ecosystem, particularly for early-stage investments. They offer a simpler, more streamlined approach to fundraising, although they are not mandatory. The documents are flexible and allow for customization based on the specific needs of each deal.
The Series Seed Docs have played an important role in the evolution of the startup ecosystem. They have helped to streamline the fundraising process and provide a starting point for negotiations. As the industry continues to evolve, the Series Seed Docs will also continue to evolve to meet the changing needs of startups and investors.
Comparing NVCA and Series Seed Docs
Each set of documents varies in length and complexity.
NVCA. The core NVCA document set runs 132 pages and includes at least the following:
- Term Sheet
- Amended Certificate of Incorporation
- Stock Purchase Agreement
- Investor’s Rights Agreement
- Right of First Refusal / Co-sale Agreement
- Voting Agreement
It may also include ancillary agreements such as a Management Rights Letter, Opinion of Counsel, Indemnification and other agreements. If you want a deep dive into all the terms of the NVCA docs, click here.
Series Seed. The core Series Seed Docs run 49 pages and include the following:
- Term Sheet
- Amended Certificate of Incorporation
- Stock Purchase Agreement
If you want a deep dive into all the terms of the Series Seed Docs, click here.
Choosing between Series Seed and NVCA funding documents can be a difficult decision for startups. Each type of document has its own advantages and disadvantages that should be carefully considered with legal counsel. If you’re looking for counsel, feel free to reach out to us here.
Pros of Series Seed Docs
- Simplicity: Series Seed Docs are generally simpler than NVCA funding documents. They offer more straightforward terms, which can make negotiations easier.
- Speed: Because Series Seed Docs are simpler, it takes much less time to negotiate the term sheet and definitive documents than the NVCA docs.
- Lower Costs: Because Series Seed Docs are less complex, legal fees associated with using these documents are often lower than those associated with NVCA funding documents.
Cons of Series Seed Docs
- Less Investor Protection: Compared to NVCA funding documents, Series Seed Docs offer less protection for investors. This can make it more difficult to attract investments from larger institutional investors who may require greater protections.
- Not IPO-ready: The NVCA docs assume that an initial public offering (IPO) could happen after the seed round, so it puts provisions in place to prepare for an IPO. Conversely, the Series Seed Docs assume that the normal path to IPO would include a Series A, B, C, D and perhaps even E and F round of funding. Given this assumption, they leave the IPO language for the next round.
Pros of NVCA Funding Documents
- Standardization: One key advantage of using NVCA funding documents is their standardization. These forms have been developed over many years by experienced investors and legal professionals. They are the most common set of fundraising docs, so investors and investor counsel are deeply familiar with them.
- Greater Investor Protection: NVCA funding documents typically offer greater investor protections than Series Seed Docs. This can make it easier to attract investment from larger institutional investors who may require these protections.
- More Established Terms: Because the terms used in NVCA funding documents have been established over time, they provide a clearer picture for both startups and investors about what they should expect.
Cons of NVCA Funding Documents
- Higher Legal Fees: Because these forms are more complex, legal fees associated with using them are often higher than those associated with Series Seed Docs.
- Slower Process: Because NVCA funding documents are lengthy, negotiating the term sheet and the definitive documents just takes longer than the Series Seed Docs.
The decision between Series Seed and NVCA funding documents will depend on a variety of factors unique to your startup. It’s important to carefully consider the pros and cons of each option before making a decision. Consider consulting with legal and financial professionals to help you make an informed decision that meets the needs and goals of both your company and potential investors.
How to Choose a Funding Document for Your Startup
Choosing a funding document for your startup can be complex. You should carefully consider several factors, including the stage of your company, the amount of investment you are seeking and your goals for the future.
If you are an early-stage startup seeking a smaller investment amount, Series Seed Docs may be a better fit. These documents offer simplified terms and are often used for investments under $2 million.
However, if you are a more established startup seeking more than $2 million, NVCA funding documents may be a better option. These documents offer more complex terms and greater protection for investors.
Before making a decision, carefully review all provisions in both types of documents with legal counsel to help you make an informed decision that meets the needs and goals of both your company and potential investors.
The Role of Legal Counsel in Negotiating and Drafting Series Seed and NVCA Funding Documents
Legal counsel plays a critical role in negotiating and drafting both Series Seed and NVCA funding documents. Their expertise can help ensure that the terms of the investment agreement meet the needs and goals of both founders and investors. Here are some specific ways legal counsel can assist with negotiating and drafting these types of agreements:
- Understanding Investor Expectations: Legal counsel can help founders understand the expectations of potential investors, including their desired return on investment, timeline for exiting the investment and any specific terms they may be looking for.
- Balancing Founder Control with Investor Protection: Legal counsel can help negotiate terms that allow founders to maintain a significant level of control over the company’s operations while also providing sufficient protections for investors.
- Identifying Potential Issues: Experienced legal counsel can identify potential issues or areas of concern in the investment agreement before they become major problems down the road.
- Ensuring Compliance: Legal counsel can ensure all provisions in the document comply with state and federal securities laws.
- Providing Clarity: Investment agreements can be complex documents filled with legal jargon. Legal counsel can help provide clarity around key terms so all parties fully understand what they are agreeing to.
- Customizing Terms: While the funding documents are standardized, there is still room for customization based on the unique needs of each startup. Legal counsel can help draft customized terms that meet those needs while still complying with industry standards.
Legal counsel plays an important role in ensuring both Series Seed and NVCA funding documents meet the needs and goals of startups and investors alike. Founders should work with experienced legal counsel to ensure their investment agreements are legally sound, financially feasible and set them up for success in future fundraising rounds. If you’re looking for legal counsel for your seed round, reach out to us here.