NVCA Model Docs....times are a changin'

For the first time since 2014, the National Venture Capital Association, or NVCA, has updated its model financing documents to reflect a handful of key updates in order to account for the changing world over the past 4 years. In particular, two updates really stuck out which emphasize the times we live in:

Blocks on Crypto-Currency offerings

A new protective blocking right has been added to the model charter to provide investors a veto over token, crypto-currency and block chain related offerings given that the pre-existing veto rights did not clearly apply to or cover these new types of offerings. Without the change, existing investors may have been exposed to a portfolio company circumventing the standard block on future financings by pursuing alternative crypto offerings.  
 
Anti-Harassment/Code of Conduct

A covenant has been added to the model IRA that requires the company to adopt a code of conduct governing appropriate workplace behavior and a policy prohibiting discrimination and harassment at the company. Previously, the covenants contained in the form financing documents had never gone so far as obligating the company to adopt employee handbooks, particular policies, etc. To ease the pain and cost for companies, the NVCA published a sample HR policy to address this point. This is a welcome change for the tech/VC industry and emphasizes the issues that have plagued the community the past couple years.

Kudos to the association and its general counsel advisory board!

Wire Fraud on the Rise… Could the VC Community Be Hit Next?

It has been widely reported that cyber criminals are hijacking real estate transactions by finding increasingly sophisticated ways to intercept and make alterations to wiring instructions being distributed between parties leading up to a real estate closing, resulting in the wiring party being duped into releasing funds to an alternative (and often times, off shore) bank account. Over the last year, hackers are starting to apply the same techniques to prey on the venture capital community and financings transactions. Read here

This got me thinking about the standard practice for how venture financings are closed, specifically the process around how wiring instructions are shared between a company and its soon-to-be investors as well as the particular ripeness of the industry to be targeted by similar scams.  

It is customary that leading up to the final moments before a VC transaction closing, lawyers find themselves caught in the middle of coordinating distribution of final deal documents along with the company’s wiring instructions. Here’s how it typically unfolds: (1) a company will email its lawyers the company's wiring instructions to distribute along with executed documents and the filed charter, (2) the company's lawyers turn around and send a closing email, which contains those instructions, to the Investor’s lawyers, (3) Investor’s lawyers then forward along to their client with confirmation that the closing conditions have been met and the wire should be released. By my count that is 3 emails sent containing wiring instructions…. which is 3 emails too many!

It is time for lawyers to insist that the parties to a transaction take much more calculated steps to limit the risks associated with this particular style of cyber crime. Founders and VCs should communicate directly on wiring instructions, separate from the lawyers' deal document distribution, through secured means other than email and, prior to wiring any funds, the VC (or a member of their finance team) should contact the company by phone and confirm that the wiring information sent over email is accurate. In my experience, this isn’t common practice. But it should be.