USA Law and Practice Contributed by: D. Scott Bennett, Nicholas A. Dorsey, Virginia M. Anderson and Ellen H. Park, Cravath, Swaine & Moore LLP
able), while machine learning analyses data for predictions and classifications. This additional diligence could help mitigate the risk of over - stating the use of generative AI, also known as “AI Washing” , when in fact a company is using less-sophisticated computing or has AI solutions that are not yet fully operational. Process Due diligence review customarily begins with a document review process in which the lead investor provides a due diligence request list to the company and, in turn, the company popu - lates a virtual data room with the requested materials. There is often back-and-forth between the company and investor for various follow-up requests based on findings. Diligence sessions may also be scheduled with management and cover topics such as a business overview, the valuation model or regulatory matters. The overall process typically runs over the course of a couple weeks, but can also take significantly more or less time. Additionally, companies with significant negotiating leverage may impose a limitation on scope of requests or time devoted to the diligence process. Representations and Warranties A company’s representations and warranties in the transaction’s definitive agreements also play a critical role in the due diligence process. A company must disclose any exceptions to its ability to make its representations and warran - ties in a separate “disclosure schedule” , guiding investors to certain material contracts, legal and regulatory issues and the like. 3.2 Process In the USA, the lead time required to complete a new financing round can vary, but typically takes between two and four weeks to proceed
from initial drafts to executed documents. This assumes that a term sheet with key terms is agreed upon in advance and the documenta - tion is based on the US National Venture Capi - tal Association (NVCA) forms, which leads to significantly increased efficiency. If the growth company already has outstanding convertible preferred stock (see 3.3 Investment Structure ), the process can take even less time. Working With New Investors Transaction documentation is typically based on the NVCA form documents. Company counsel will ordinarily prepare initial drafts of the docu - mentation – although practice is mixed, particu - larly when the company is issuing its first series of convertible preferred stock. The company is often required to pay the investors’ legal fees in connection with the investment, subject to a cap. New lead (or “anchor” ) investors will typically utilise their own legal counsel to negotiate the transaction documentation. Lead investors often engage outside counsel. The second-largest investor may also engage separate counsel, depending on the size of their investment. Small - er investors often leverage their own in-house legal teams, generally follow the terms negoti - ated by the lead investors, and focus their dili - gence on any areas of particular focus for their fund or on key areas specific to the deal. Role of Existing Stockholders Existing stockholders have a limited role in the new financing round, except as investors in the round and/or for purposes of consenting to the financing. A growth company typically must obtain the consent of existing stockholders to initiate a new financing round, even if the new financing is not senior to the existing financing
627 CHAMBERS.COM
Powered by FlippingBook