USA LAW AND PRACTICE Contributed by: George Casey, Heiko Schiwek, Elena Rubinov, Vinita Sithapathy, Kristina Trauger, Pierre-Emmanuel Perais, Clara Pang and Gregory Gewirtz, Linklaters
2.5 Venture Capital Documentation In the USA, the terms and documentation for equity and debt-to-equity financing documents are highly standardised. These standards encompass typical economic, control and contractual terms, including provisions related to: • dividends; • liquidation preferences; • conversion rights; • pre-emptive rights; • anti-dilution; • voting agreements; • rights of first refusal and co-sale agreements; • board designation rights; • registration rights; and • information rights. The National Venture Capital Association (NVCA) has developed a suite of standardised investment docu- ments, which are frequently (though not universally) utilised by many start-ups and venture funds. 2.6 Change of Corporate Form or Migration As start-ups grow and pursue VC funding, they often modify their corporate structure or relocate to a differ- ent jurisdiction. In their early stages, some start-ups opt for flexible entities such as LLCs or partnerships, which offer simpler tax advantages. However, as they progress and require more significant VC investment, they are typically advised to transition into C-Corpora- tions due to their scalability, limited liability and greater transparency for equity trading. Moreover, while some US-based start-ups may initially incorporate in states other than Delaware, they frequently re-incorporate in Delaware (or potentially other states with growing popularity – eg, Nevada or Texas) as they mature. 3. Initial Public Offering (IPO) as a Liquidity Event 3.1 IPO v Sale US initial public offering (IPO) activity in 2025 has been consistently stronger than in the previous four years. However, persistent inflation concerns, market dynamics and shifting governmental policies have led to uncertainty in the IPO market. Given the chang-
• foreign investors; • accelerators; • seed-stage venture capital (VC) funds; or • micro-VC funds.
Angel investors are typically high net worth individuals or investment groups that are interested in diversifying their investments and maximising the long-term gains potential of early-stage companies. Accelerators are programmes developed to provide services and men- torship to founders and often have a specific indus- try focus. Micro-VC funds are typically small venture funds, usually with one general partner, that invest at the seed stages alongside angels. Seed-stage VC funds are larger than micro-VC funds and are typically the first institutional investor in a start-up. Government-sponsored funds are public policy tools that provide financial support to innovative start-ups and companies. Foreign investors may include high net worth foreign residents or institutional funds with foreign partners or sponsors seeking lucrative oppor- tunities in the USA. Early-Stage Investment Documentation Early-stage start-ups frequently secure funding from angel investors and early-stage funds using instru- ments such as simple agreements for future equity (SAFEs) and convertible notes. Both SAFEs and con- vertible notes involve investors providing capital in return for an instrument that will convert into preferred stock, typically at a discount to the future stock price or based on a valuation cap, or both, established at the issuance date. Unlike convertible notes, SAFEs do not accumulate interest or have a maturity date. Y Combinator, an accelerator, has published a database of template SAFEs that are intended to be straightfor- ward, negotiation-light forms. 2.4 Venture Capital Generally, VC in the USA is primarily sourced from VC firms that provide crucial early-stage funding to high-growth start-ups. Government-sponsored pro- grammes also offer significant VC support to foster technological innovation. Additionally, foreign VC firms actively and increasingly invest in US start-ups, bringing in not only capital but also valuable interna- tional networks and expertise.
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