Updates to the BVCA model documents for early-stage investments
Insight
Earlier this year, the British Private Equity & Venture Capital Association (BVCA) published updated versions of the model documents for early-stage venture capital investments which can be found here.
The principal model documents include the following:
- Subscription Agreement;
- Shareholders’ Agreement; and
- Articles of Association (and, where necessary, a registration rights agreement if an offer of shares in the United States is reasonably likely).
While the latest changes to the model documents are less substantive than the previous revisions released in 2023 (see our earlier publication on this), there have still been some notable drafting updates which we have summarised below.
The Shareholders’ Agreement
1. Restricted disclosure of information:
The BVCA has added optional drafting which permits the board (acting reasonably and in good faith) to restrict access to information for “strategic” investors in certain scenarios. This includes where disclosure would lead to a conflict of interest or where such information is of a sensitive proprietary nature.
This change is particularly helpful where strategic investors operate in the same sector as the company receiving their investment.
2. Indemnification of investor directors:
Optional language has been included dealing with indemnification of directors. This provides for the Company to either (i) enter into an agreement to indemnify an investor appointed director or (ii) to indemnify such director directly. In each case the indemnity may extend to liability arising from such director’s negligence, default, breach of duty or breach of trust.
Such wording has been included to reflect how the market is approaching director’s indemnification and, in particular, that inbound US investors typically seek to include such indemnity provisions in the constitutional documents of their early-stage investments.
3. VC investment opportunities:
The BVCA has incorporated new clauses to acknowledge and address the reality that large-scale investors often have a varied portfolio of investments that may overlap and/or compete. The new drafting sets out that, provided no confidential information is disclosed, the investors will not be restricted from continuing to hold investments and/or exploring investment opportunities where there may be products or services which compete, directly or indirectly, with those of the company.
4. Variation of share rights:
New drafting has been added to the Shareholders’ Agreement (and to the model Articles of Association) to deal with the exercise of any rights relating to the reclassification, conversion, redesignation or denomination of preference shares or employee/founder shares (or the variation of voting or economic rights of employee/founder shares) in accordance with the constitutional documents of the company. This new clause provides that such actions shall not constitute a variation of the relevant rights attaching to those shares, nor will they require additional class consents.
This update is in response to the Court of Appeal’s judgment in DnaNudge Limited v Ventura Capital GP Limited [2023] EWCA Civ 1142 where it was noted that the exercise of a right to convert preference shares into ordinary shares by notice required a shareholder class consent. For further details please see our publication on this case here.
5. Undertakings:
The undertakings given by the company have been updated to include, among others, anti-bribery and corruption (ABAC), anti-money laundering (AML), anti-tax evasion, sanctions and governance. These updates reinforce the existing undertakings and are consistent with the increasing focus on compliance and corporate governance issues.
Existing undertakings given by the company and its subsidiaries relating to, among others, state aid funding, maintaining a “permanent establishment”, or carrying out an “excluded activity” (in both cases, within the meaning of the Income Tax Act 2007) have also been updated to be subject to the fiduciary duties of directors.
The Articles of Association
1. Definition of a “Bad Leaver”:
The defined term “Bad Leaver” has been amended to remove the optional limb for where a service provider to the company resigns.
2. Liquidation preference:
The waterfall provisions have been updated to reflect how such provisions are often applied in practice in relation to the Series A shares. These changes clarify that in calculating the relevant distribution under the waterfall, the directors may (acting with investor consent) determine the applicable exchange rate for amounts designated in different currencies. The optional language relating to liquidation preference for EIS/VCT investors has also been re-drafted, but the practical effect remains largely unchanged.
3. Anti-dilution:
The updated Articles of Association clarify how the anti-dilution provisions work where the share class for a Series A round has shares with different starting prices. The drafting provides that the investor majority may waive the anti-dilution protection in whole or in part so that no dilution rights shall apply to a qualifying funding round (a down round). The result is that, for example, shares issued at a discounted price upon the conversion of convertible securities shall be deemed to be issued at a price with no discount for the purposes of the anti-dilution provisions.
4. Sanctions:
The Articles of Association have been updated to include sanctions-related wording to ensure that shares are not issued or transferred to sanctioned persons. The board is also provided with wider discretion to request further information to identify whether individuals are subject to sanctions. Directors who become sanctioned persons are now also required to vacate office.
Corresponding definitions have been added so that the above provisions cover sanctions enacted, administered or enforced by the United States, the EU (or individual member states), the UK and the United Nations.
5. Pre-emption rights on new share/securities issuances:
Optional drafting has been inserted to address concerns from investors that a majority of investors participating in future securities issuances, might waive pre-emption rights, which results in the exclusion of minority investors (who would otherwise benefit from pre-emption rights). This change seemingly tries to balance the rights of the majority and minority shareholders. However, the BVCA has not expressed any opinion as to whether these revisions are market standard and has noted that this could, in fact, complicate future financing.
Similarly, optional drafting has been included in respect of the designation of certain transfers as permitted transfers, with the BVCA using the same reasoning as above.
The Subscription Agreement
1. Completion mechanics:
A more streamlined completion mechanics process has been added to the Subscription Agreement as an alternative process for investments where the company is expected to receive all funds prior to completion. This option carries fewer protections and may not be suitable for all investment scenarios. For example, the standard completion process gives the board discretion to vary the terms of the Subscription Agreement to remove all provisions relating to an investor that has failed to pay the subscription amounts prior to a longstop date.
2. Additional warranties:
There have been updates to warranties relating to intellectual property, data protection and business systems. Notably, new warranties relating to AI have also been inserted which reflects the rapid growth of investment in AI companies, alongside new warranties relating to insolvency events.
3. Regulatory investigations:
The BVCA has included an optional provision to address potential investigations or actions by regulatory authorities (including under the National Security and Investment Act 2021) which would require the company and its founders (to the extent possible) to assist the investors should a funding round become subject to such investigations.
Farrer & Co’s Corporate team regularly advises both companies and prospective investors on fundraising rounds, ranging from early-stage through to later stage, and we would be delighted to discuss how we can assist you. If you have any questions or would like to explore our services, please do get in touch with authors of this publication.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2025
