This article continues our analysis of the “Open Source Seed Financing Documents” released by the Australian Private Equity and Venture Capital Association Limited (AVCAL). Below, we look at how the AVCAL documents attempt to balance investor and founder interests.

Do the AVCAL Documents Represent Industry Standard?

Although the documents are made available by a reputable industry participant who has access to top level commercial and legal resources, the AVCAL documents do not represent industry standards. A large number of investors have collectively approved the documents as it provides a favourable template to use when negotiating with startups.

On that basis, founders may assert that the “Open Source Seed Financing Documents” are not necessarily industry standard, but they are a good starting point. We are increasingly seeing investors using these documents as the base documents for their negotiations.

If an investor presents these documents as the industry standard, remember that the “standard” to which the investor refers is a standard issued by an association which consists mainly of investors. Although, they are intended to take into account the interests of the startup as well as the investors.

Balancing Investor and Founder Interests

In general, the documents do try to strike a balance between founders’ interests (who have committed a great deal of their time and talent to the business) and the interests of the investors (who accept significant risk when investing in a startup).

For example, consider how the documents treat the vesting of founders’ shares –  a commercially sensible principle. The founders’ shares vest over time, meaning that founders only acquire the full benefit of all of their shares after they have worked for the company for a specified period. If the founders leave before their shares have vested, they have to sell back any unvested shares. The idea is that this incentivises the founders to stay with the company, at least during the crucial first few years as the business grows. After all, an investor will want to know that the founders will remain with the startup for the next few years to ensure its continued growth.

Recommendations

In negotiations where investors hold more relative bargaining power, founders may find themselves unable to negotiate many provisions of the AVCAL suite. In such cases, founders should focus on the key negotiation points that will deliver the most gains and are achievable in their circumstances.

In negotiations where founders hold more relative bargaining power than investors, founders may be able to negotiate more terms of the documents to improve their position. Alternatively, founders may want to consider asking their lawyers to use a suite of documents that is more “founder friendly” as a starting position.

Key Takeaways

Depending on the relative bargaining positions of parties in the negotiations, a startup’s founders may not be in a position to insist upon documents other than the AVCAL suite. However, even in such cases, founders should still try to enhance their position by negotiating the key terms of the AVCAL documents to ensure they get the best deal possible. If you have any questions about your startup’s documents, get in touch with our startup lawyers on 1300 544 755.

Working on a startup? Download LegalVision’s Startup Manual – a free 60-page manual featuring 10 case studies and tips and tricks from Australia’s leading VCs and startups.

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Jill McKnight
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