USA LAW AND PRACTICE Contributed by: George Casey, Heiko Schiwek, Elena Rubinov, Pierre-Emmanuel Perais, Clara Pang and Gregory Gewirtz, Linklaters LLP
Early-Stage Investment Documentation Early-stage start-ups frequently secure fund- ing from angel investors and early-stage funds using instruments such as simple agreements for future equity (SAFEs) and convertible notes. Both SAFEs and convertible notes involve inves- tors providing capital in return for an instrument that will convert into preferred stock, typi- cally at a discount to the future stock price or based on a valuation cap, or both, established at the issuance date. The SAFE, developed by YCombinator (an accelerator), is intended to be a straightforward, negotiation-light form and, unlike convertible notes, does not accumulate interest or have a maturity date. 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 programmes also offer significant VC support to foster technological innovation. Addi- tionally, foreign VC firms actively and increas- ingly invest in US start-ups, bringing in not only capital but also valuable international networks and expertise. 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 con- tractual 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 invest- ment documents, 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 different 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. Moreo- ver, while some US-based start-ups may initially incorporate in states that are convenient for their circumstances, they frequently re-incorporate in Delaware. 3. Initial Public Offering (IPO) as a Liquidity Event 3.1 IPO v Sale A notable trend today is that start-ups are remaining private for extended periods rather than opting for an initial public offering (IPO). Given the changing macroeconomic environ- ment, many businesses are postponing their IPOs, largely due to the rigorous scrutiny and extensive preparations involved. Consequently, investors often prefer a private sale since it offers a simpler process and provides faster liquidity.
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