Following a consultation with law firms working with startups (with Simmonds Stewart representing founders’ perspective), the NZ Angel Association (AANZ) have released new template cap raising documents. These documents can be found at https://www.angelassociation.co.nz/resources/best-practice/doing-the-deal/.
The templates are designed for seed and series A investment deals. They include a term sheet, a long form subscription agreement and shareholders’ agreement, as well as a constitution.
Those familiar with the NZ Venture Investment Fund (NZVIF) documents will see that the new AANZ templates are similar in style. The expectation is that AANZ will take ownership of these industry standard documents going forward, and that the NZVIF documents will eventually be retired.
Will this transform cap raising for NZ startups?
Unlikely. If founders had hoped for materially simplified documents from this review, they are likely to be disappointed. The documents still have the look of series A documents, yet will likely be used for much smaller seed rounds.
By coincidence, around the same time as the AANZ documents were released, the Singapore Venture Capital Association (SVCA) released their own startup investment templates. Looking at them side by side, they are not materially different. This needs to be put into context however – the Singapore templates are designed for series A transactions in which $2-5million is invested, whereas the AANZ documents will likely be used on smaller deals from $500k upwards.
In other startup ecosystems around the world, convertible notes and SAFEs are commonly used by companies raising up to $1million. We are increasingly seeing NZ companies looking to these instruments for reasons of speed and to avoid lengthy negotiations when raising small amounts of money.
What’s new in the AANZ documents?
The combined NZVIF subscription and shareholders’ agreement has been split into a separate subscription agreement and shareholders’ agreement. This is a positive step and follows international trends. Now the subscription agreement can be consigned to a drawer after claims periods have expired, leaving the shareholders’ agreement as the living document alongside the constitution. Future investors will now just need to review the shareholders’ agreement and constitution, simplifying the next round of investment.
The term sheet now has some helpful footnotes. We’ve found from our own Simmonds Stewart templates that user notes are great for guiding through the key terms when raising money from investors.
Are the templates more founder friendly?
The documents are an improvement on the NZVIF documents. One of our issues with those templates had been that they were over-complicated and more intrusive than investors really required on early stage deals. Inevitably, template documents hosted by AANZ, even following this latest review, were always likely to remain investor friendly. For example, items such as tranched investments and milestones, which remain as options, could arguably have been removed completely, given they are now rarely seen on deals.
There is some good news for founders however:
- a few of of the more investor friendly terms from the NZVIF templates have been removed completely. For example, there is no longer the option for a full ratchet anti-dilution right with the broad-based weighted average formula being the default position. Given that full ratchets are virtually extinct nowadays, this was to be expected
- the default percentage on tag along rights (effectively giving investors to right to sell if a larger shareholder is looking to sell) is no longer set at 20%, but rather at 50%. This is a better position for founders
- the footnotes to the NZVIF documents implied that up to a 3x liquidation preference was not uncommon. That view is out of sync with global trends, and thankfully the AANZ templates now refers to 1x non-participating preference as the most common position
- any reference to a preferred dividend has been removed. Given startups rarely pay dividends, this is largely academic of course
- the new templates are much clearer on pre-emptive rights, for example, whether or not the pre-emptive rights holders have an over allocation as angel investors in NZ often invest follow-on money into NZ startups, it is helpful for founders to understand at term sheet stage what their obligations are on this
- the templates also have more optionality in places, for example, on the investor veto rights where certain items are now in square brackets. On our overseas VC transactions, we often see veto rights split into board approved matters and shareholder approved matters to give flexibility to founders on all but the major corporate actions, while still maintaining good corporate governance. The AANZ documents have not taken that approach, however
- finally, there is no longer a cap on the adviser fees that the company can incur on the deal. Given it is key that startups have the opportunity to take their own legal advice, this is welcomed
If startups are raising money from one of the NZ angel groups they can expect to be presented with these new templates. If they have other types of investors lined up, then some of our Simmonds Stewart templates could be more suitable.
by lee bagshaw, 15 April 2019