5 Common Issues To Look Out For In Your Venture Deal Documents
Updated: Jan 6
Venture investment documents often contain mistakes. Some commonly occurring issues can have a huge impact on your portfolio and the success of your fund.
1) You Complete Me
Incomplete closing set documents are one of the most common issues facing nearly every venture investor. The five standard documents necessary for a typical equity investment are the:
Certificate of Incorporation
Investor Rights Agreement
ROFR & Co-Sale Agreement
Stock Purchase Agreement
Any less and you may be: missing out on critical data to track your investments, allowing unseen issues in your portfolio slip by, and operating in breach of your LPAs. Investing in startups is tough enough as it is...don’t let yourself be on the opposite end of a five-on-four power play!
2) Having the final Word isn’t good enough
The differences between the “final” Word version of your deal documents versus the final executed PDF copy can be quite drastic and those differences can carry quite an impact. Venture deal documents are often drafted, negotiated, and prepared in Word draft, but too often are not finalized and signed by all parties. This leads to uncertainty for both current and subsequent investors in the company and what rights all parties are granted. For example, the absence of a final executed and signed shareholders’ agreement could allow certain equity holders to block a potential venture investment and to hold up the transaction in exchange for preferential rights.
Furthermore, 11th hour changes do happen between when a deal is being finalized (in Word draft) to when the deal is fully executed (in PDF). Which leads us to our next point...
3) Too Legit to Omit
In our experience, some of the biggest issues in venture deal documents stem from issues of inadvertent omission. In the hundreds of pages of documents that are being drafted and negotiated for a venture transaction, it’s no surprise that a few things might slip through the cracks. But sometimes these slips can be hugely impactful for you, your co-investors, and the startup. We have seen instances where investors that have specifically negotiated for certain rights have discovered those same terms missing after the deal was done. In other instances, there are cases where investors that have participated were entirely left off the schedule of purchasers...even after signing and wiring money for their investment.
Again, amidst the hundreds of pages, the myriad of details, and tight timelines, it’s understandable that issues present themselves in venture transactions. But identifying these issues before they compound in severity or critically impact your potential returns is key.
4) Correctly Calculate Before It’s Too Late
The devil is in the details and an alarming number of venture transactions contain inaccurate calculations that can impact an investor’s potential returns or what they report to LPs. Alluding to an earlier point, an investor being left off the schedule of purchasers will inevitably lead to miscalculated ownership figures in a venture transaction. But there are also less obvious examples that are surprisingly prevalent in venture deals such as when it’s been found that more shares are sold than authorized in the charter. Whether it’s because of a miscalculation or an issue stemming from inaccurate deal documents, it’s important to ensure these calculations are correct.
5) Location, Location, Location
Lastly, just know where your docs are located. It can be too easy to forget to properly save and store all your final executed documents in a central repository. With a growing portfolio, it’s easy to understand why these deal documents can be misplaced or not saved properly. But it’s important to set up some sort of central location where you can find them. Whether that’s with a shared drive like Box or Dropbox or Aumni’s platform designed specifically for venture teams, make sure to store your venture deal documents someplace where you can find them.