Why not to use the CVCA Model Documents for angel financings (or, How to save a tree)

There is a lot to like about the National Venture Capital Association (NCVA) model documents and their Canadian counterparts, developed by the Canadian Venture Capital and Private Equity Association (CVCA). These models were created for venture capital (VC) financings, the area where they can be truly useful. The main virtue of the CVCA Model Documents is that they follow US forms and are familiar to US VC investors. In a cross-border VC deal, this can help remove the fear factor for US VCs investing for the first time in a Canadian company. However, the documents are very detailed and in keeping with US practice, scatter key terms across a suite of five or six agreements. This creates repetition as well as sheer bulk, which can be painful if you are simply trying to close a $200K to $1 million angel round or seed financing.

The CVCA Model Documents are also not calibrated for angel or seed financings, for reasons other than just length:

  • Long detailed documents can create unexpected consequences if the parties submit to fatigue and simply accept terms that are not suitable for an early-stage company.
  • It may be premature to provide terms to angels that are usually afforded to VCs, which can create problems in the company’s first real VC round, when rights provided to angel investors may need to be stripped back.
  • Some of the CVCA Model Document terms only work if the investors have representation on the board of the company, which many angel investors do not want.
  • It can be hard for angel-backed companies that have little or no administrative support, and a small or non-existent legal budget, to cope with a suite of five or six documents—often with slightly different parties—that must be checked, tracked, waived and amended at various points through the company’s early growth phase.

As an alternative, we have created a set of Seed Preferred Share angel documents for a Canadian angel deal, consisting of a term sheet, a subscription agreement, articles (share provisions) and a single shareholders agreement. These documents have been crafted to capture, in a fair and balanced way, the key terms that in our experience are most important to angels. We have attempted to address quirks of Canadian corporate law that can result in minority shareholders ending up with blocking rights in unexpected situations. We have also set up these documents so that they can easily evolve through a VC deal. In particular, we have retained sufficient detail in the share provisions so that they can be adapted through multiple rounds. We have chosen to focus on Seed Preferred Shares, since we feel SAFEs are already well covered by YCombinator. If there is demand, we will post convertible note documents as well. All of the documents are automated for easy customization.

To show our appreciation and support for Canada’s hard-working angel and start-up communities, these automated documents will available online for free. Happy angel investing!

If you require further information or have questions about these documents, please contact us at startups@dentons.com.

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