Category: Funding

Series Seed Investments – Words to the Wise

As discussed in my previous blog, Series Seed documents are typically more appropriate for seed investments than the more complex and burdensome NVCA forms. However, since the initial release of the Series Seed forms ten years ago, other parties have released their own version of Series Seed document. As a result, companies wanting to use Series Seed documents need to determine which version of these documents to use.

The original documents drafted in 2010 by a group led by Ted Wang have been updated and are still widely used. Among the other versions drafted since that time, probably the leading version is a set of documents available from CooleyGo. One of the key differences in the CooleyGo documents is how the authors provide access to the documents. The Wang Series Seed documents are publicly available as Word documents. In contrast, while the CooleyGo versions are also available in Word, they can only be downloaded after answering a series of questions about the proposed offering. Many of the questions are not easily answerable by people with no expertise in this area and are best handled by counsel or other experienced finance professionals. The CooleyGo approach is a wise one in my view, as funding is a complex area that should only be undertaken with proper assistance from professional advisors. Although Series Seed documents are simpler than NVCA forms, raising equity capital without substantial input from legal counsel is a recipe for misunderstanding, inefficiency, and often disaster.

There are also some substantive differences between the CooleyGo and Wang Series Seed documents. Perhaps the most significant difference is that the CooleyGo version contains an optional anti-dilution provision (anti-dilution refers to later sales at a price lower than the current investors paid; it does not relate to dilution of ownership interest generally). Another substantive change is that the CooleyGo documents contain “bad actor” provisions, which relate to federal securities law and are a reasonable addition, as they help assure that the investment offering qualifies for an appropriate private offering exemption.

Beyond the differences between the two leading versions of the forms, companies that are pursuing funding should be aware that while both versions are more appropriate than NCVA forms for seed investment, none of the versions of seed documents are simple documents, and they all contain provisions that could be problematic for the company. One of the most significant items is the typical presence of founder stock vesting provisions. This mean that the founders’ shares will vest over time, as would be the case for later employees, and the founder is at risk if he leaves the company before the vesting period (typically four years) ends. While there is good logic behind these provisions, they have the potential to unfairly disadvantage the founder. Once these vesting provisions are included in the documents, it is typically difficult to convince the investor to remove them entirely, but experienced legal counsel can offer several alternatives that retain the vesting provisions but lessen the risk to the founder.

There are other parts of the Series Seed documents that the company should understand, and depending on various factors, should consider requesting modifications or deletion of those provisions altogether. The exact list depends on the circumstances, but other top-level features of Series Seed documents are investor participation rights, drag-along rights (potentially requiring the founders to agree to a sale of the company), and payment of the expense of investor’s counsel in addition to their own representation. These points should help reinforce an earlier point – while the Series Seed documents are less complex than NVCA forms and more appropriate for seed investment, they are not simple documents, and the company needs to work with counsel who has specific experience in the area of seed investment.

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