What is a Venture Capital Agreement Review?
A venture capital (VC) agreement is a legal agreement that outlines the terms of an investment a venture capital investor makes in a startup, such as ownership and exit provisions.
Usually, it begins as a non-binding term sheet that precedes the drafting of a legally-binding agreement.
Before signing a venture capital agreement, you should review it for clarity and legal soundness.
Read the rest of this article to explore what a venture capital agreement contains, how to review it, and when to consult with a lawyer for a legal review.
What Does a Venture Capital Agreement Usually Contain?
A venture capital agreement contains key terms such as the following:
- Ownership. This section of the agreement outlines how many shares the investor will own in the company in exchange for their investment.
- Terms. The investment amount is specified, as well as what milestones should be met prior to funding.
- Types of securities. This outlines the types of securities that are being issued, such as stock or convertible notes.
- Investor protections. These protect the investor’s stake in the company, and can include voting rights or other benefits.
- Exit provisions. If the investor wants to sell their shares or back out of the investment, the agreement should specify how they can do this.
- Representations and warranties. This provides the investor with promises about the company’s financial stability and legal compliance.
How Can You Review a Venture Capital Agreement?
When reviewing a venture capital agreement, it’s worth taking your time to scrutinize every term carefully. Here are tips to bear in mind.
Check it Against the Term Sheet
Since the term sheet would have preceded the agreement, both documents should be aligned. This ensures that initial discussions and agreements are being honored.
Confirm all Details
Since there are many details in a VC agreement, such as the investment amount, you want to check they’re all accurate instead of skimming over them. You don’t want to risk being put at a financial disadvantage later.
Consider How Much Control You Want
The VC agreement will specify how much control you will gain, such as in the form of board seats or voting rights. You should check that these clauses are written clearly so that there’s no uncertainty.
Think About Investor Protections
A VC agreement has to balance investor protections with company requirements. As an investor, you should check how you’ll be protected. Common investor protections include anti-dilution clauses that safeguard ownership; and approval rights, which give investors a voice without them having to directly run the business activities.
Green Flags in VC Agreements
Some green flags to notice in VC agreements include:
- Balanced terms that protect both parties.
- Clear, specific wording that avoids vagueness which can be misinterpreted.
- Fair investor protections that make you feel confident about your investment.
- Flexibility for future funding.
- Consistency with your financial and business goals, such as awarding you with greater control.
Red Flags in VC Agreements
By comparison, there are some risky clauses in the contract:
- A lack of protections. This can make the VC agreement one-sided to favor the company.
- Limited control, such as regarding approval rights.
- A lack of exit strategies, which could cause investors to remain stuck in a non-profitable investment.
- Restrictive clauses, such as in terms of transfers.
- Ambiguous wording, such as when it comes to rights and financial terms.
Do You Need to Hire a Lawyer to Review Your Venture Capital Agreement?
It’s highly recommended to work with a lawyer for a professional legal review of your venture capital agreement. This is because you could miss hidden risks or unfavorable clauses that put you at a disadvantage.
A lawyer is skilled at identifying anything risky in the contract that doesn’t serve your interests. Here are some of the ways in which a lawyer will help you during a legal review:
- They’ll explain the current and long-term consequences of agreeing to the contract so you understand everything it contains.
- They’ll spot hidden risks, such as veto rights that could reduce your control.
- They’ll check that the agreement reflects what was previously agreed on in the term sheet.
- They’ll unpack legal jargon or complex language that can make terms confusing or misleading.
- They’ll negotiate any one-sided or unclear terms in the VC agreement on your behalf.
- They’ll use their in-depth legal knowledge to ensure compliance with all relevant laws and regulations.
- They’ll review the agreement in light of your future funding opportunities, such as by checking for any clauses that could potentially hamper them.
Where To Get a Legal Review of a Venture Capital Agreement
Finding a lawyer to review your contract can seem overwhelming, especially if you don’t know any legal professionals. A qualified lawyer is easier to find on an online legal platform, such as ContractsCounsel.
As one of the largest online legal marketplaces providing access to over 1,000 lawyers, ContractsCounsel puts you in touch with lawyers who are experienced and have been vetted on the platform. They have worked with numerous clients to review venture capital agreements and other contracts.
If you wish to request a legal review from a professional, reliable lawyer on ContractsCounsel, here are the simple steps to follow:
1. Visit the ContractsCounsel marketplace.
2. Post your project for free, including some details about it so that lawyers will know how best to assist you.
3. Receive multiple lawyer bids from lawyers on the platform.
4. Review the lawyers’ profiles by viewing data that’s provided on the platform, such as their location, expertise, years of experience, and client ratings.
5. Choose a lawyer for your legal requirements.
