Moves have been afoot in the last couple of years for the UK venture industry to follow the US example and come up with more generic legal documentation in order to cut transaction costs on deals. It now looks like a BVCA-sponsored
initiative is close to fruition, with the association expecting to publish standard documents in Q1 this year covering the financing of early stage venture deals. The documents will cover the term sheet, subscription agreement, shareholders agreement and articles of association.
Although some media coverage has suggested the scheme is also aimed at private equity, those involved stress that it is purely focused on Series A venture financing. “In buyouts the sums are much larger and people want a bespoke service,” says Simon Witney, partner at SJ Berwin.
The main reason for the initiative is the recognition that transaction costs can take up a disproportionate share of the value of early stage venture deals. Rather than lawyers having to reinvent the wheel on each deal and tailor documentation for each transaction, the standard documents will, in theory, enable them to take a more off the peg approach. BVCA chief executive Peter Linthwaite says the association’s approach is to produce reasonably standard documents that contain some scope for adjustment, depending on negotiations concerning the specifics of the company. “Obviously we don’t want to have too much adjustment to the standard documents because that would defeat the overall object,” he says.
There appears to be significant support for the initiative among venture funds. “We support this development strongly because legal costs are too high, especially for first round fundraising in venture deals,” says Anne Glover, chief executive of Amadeus Capital Partners. She believes it is in the interests of both lawyers and clients to back the scheme and says: “There is no question but that it will help smaller venture funds with their costs.”
So, how likely is it the BVCA initiative will succeed? It will clearly be crucial that a critical mass of venture houses and law firms specialising in this area support the scheme by actually using the standard documents and making them part and parcel of the industry. “We hope that the role of the BVCA in involving the various parties will enable it to get the critical mass it needs,” says Linthwaite, highlighting the fact that the association’s technology committee, made up of leading lawyers and venture fund executives, has played a key role in taking the scheme forward.
Anne Glover says the effectiveness of the initiative will depend on factors including how well it is marketed and whether the law firms are disciplined enough to follow it.
Simon Walker, a partner at Taylor Wessing and member of the BVCA’s technology committee, says: “Adopting the provisions will mean the lawyers won’t have to argue over the language of provisions, which are essentially the same.” He adds that transaction costs on venture deals have already been falling significantly as a result of growing convergence among law firms: “But it’s only when you have model documentation being used that you get the real benefits,” he says.
Some lawyers downplay the significance of the initiative. Kathryn Brown, a partner at law firm Paul Hastings, says the standardisation initiative by the US National Venture Capital Association (NVCA) in 2003 has proved to be a “useful tool but not a revolution.” She comments: “There was already increasing convergence in the documentation in the US, and the NVCA initiative just made that more public and was saying, ‘this is what the industry is doing’.” The scheme in the US was more about encouraging the convergence among law firms, rather than replacing what the law firms were doing, she argues, adding that a similar trend is occurring in the UK.
Brown also takes issue with the claim that standardisation of documents will impact on transaction costs on venture deals: “Law firms already have their own in-house standard documents, so I don’t think this new initiative will reduce costs. If venture houses believe they have been overcharged that is more down to bad law firms than any lack of standardisation.”
The way the scheme pans out in the UK could determine whether a similar standardisation is adopted in Continental Europe. The BVCA initiative was discussed at a European Venture Capital Association (EVCA) legal and tax conference last December. Taylor Wessing’s Simon Walker says it was an awareness-raising exercise and a spokeswoman for EVCA says developing standardised documents is not a priority given the diversity in European legislation.
The diverse legal systems in Continental Europe are clearly a significant obstacle to any future attempt at standardisation but, according to Peter Linthwaite, there is probably some scope for standardisation in areas such as the investment agreement. “But when it comes to the more company-specific stuff, such as articles of association, the different corporate law systems would present a barrier.”
According to Simon Walker, there would also be obstacles in attempting to replicate the standard Anglo-American venture structure in Continental Europe. “The UK term sheet looks pretty similar to the US term sheet but in Continental Europe it wouldn’t be as easy to standardise.” He adds that another important factor is deal flow. In the US and UK deal flow in venture is much higher than in Continental Europe, notes Walker, and this factor has contributed to convergence in the legal documentation. “For standardisation to be developed in Continental Europe there would probably first have to be a lot more deals,”