Start-up Lawyering – The VIMA Approach
The Singapore government is taking significant steps to boost Singapore’s appeal as a regional hub for start-ups and venture capital investments. However, despite the boom in such investments, there is a lack of an industry standard in Singapore and the South-east Asian region for VC financing documentation. The Venture Capital Investment Model Agreements (VIMA) were launched to provide start-ups and entrepreneurs with a balanced, well-informed starting point for negotiations.
In October 2018, the Singapore Academy of Law (SAL) and the Singapore Venture Capital and Private Equity Association (SVCA) launched the Venture Capital Investment Model Agreements, or “VIMA”, in short.
Chief Justice Sundaresh Menon, who launched the VIMA, stated that “this initiative complements the national efforts to foster the growth and vibrancy of the venture capital ecosystem in Singapore; and we also expect the VIMA will play a key role in driving the adoption of Singapore law for early-stage financing transactions as the model agreements will all provide by default that they are to be governed by Singapore law and that any disputes arising therefrom will be resolved in Singapore. ”.1Chief Justice Sundaresh Menon, Opening Address at SAL 30th Anniversary Appreciation Dinner (23 October 2018), <https://www.sal.org.sg/Newsroom/Speeches/Speech-Details/id/742> (accessed 8 April 2019)
Mr Sriram Chakravarthi, Senior Director at the SAL and Ms Doris Yee, Director at the SVCA, answer questions about the VIMA and how Singapore lawyers could contribute to and be part of the VIMA initiative.
Q. What was the impetus behind the VIMA initiative?
Singapore’s start-up eco-system is flourishing. If you look at Finance Minister Mr Heng Swee Kiat’s February 2019 budget speech, you will note that there are now over 220 venture capital deals per year in Singapore worth close to US$4.2 billion and that more than 150 global venture capital funds, incubators, and accelerators are based in Singapore, supporting start-ups here and in the region.
However, despite the boom in such investments, there is currently a lack of an industry standard in Singapore and the South-east Asian region for VC financing documentation. To address this issue, the SAL and the SVCA launched the VIMA in October 2018.
The intention of the VIMA is to provide start-ups and entrepreneurs with a set of standard terms and documents for early-stage VC transactions. The VIMA documents serve as a balanced, well-informed starting point that can be customised to suit each investment, thus reducing transaction costs and shortening the time needed to close investment rounds.
Q. How does the VIMA tie in with the larger objective of developing Singapore as a regional hub for start-ups and VC investments?
Again, if you look at the 2019 Budget speech, you will notice that the Government is taking significant steps to boost Singapore’s appeal as a regional hub for start-ups and VC investments. These steps include providing customised assistance, better financing options, and supporting technology adoption to enable start-ups to thrive by scaling-up and venturing into new markets.
The VIMA initiative supports the Government’s endeavours by standardising the terms and documentation for early-stage VC financing and making them more accessible to both investors and entrepreneurs. By allowing entrepreneurs to be more familiar and educated about documents required during an early-stage VC fundraising, the investment process will be smoother and will allow for better negotiations between the VC and entrepreneur.
Q. How does the VIMA drive the adoption of Singapore law?
There is growing acceptance in the South-east Asian region that Singapore Law is well placed to meet the legal needs of businesses. Our thinking was that if we could develop an industry standard that incorporates Singapore law as the governing law and Singapore as the chosen dispute resolution forum, this standard would then find greater adoption and acceptance from start-ups and investors in Singapore and the South-east Asian region. This would in turn further enhance Singapore’s status as a regional VC financing hub.
You will be pleased to note that our efforts are already bearing fruit and we are receiving early reports of VC deals in Singapore and the region being closed using the VIMA documents.
Q. What was the process behind the VIMA’s development?
The VIMA is an example of a ground-up initiative by the legal industry. The project was jointly undertaken by the SAL’s Promotion of Singapore Law Committee and the Singapore Venture Capital & Private Equity Association, with leadership provided by a Working Group comprising members of the legal team from Temasek, Singapore law firms Allen & Gledhill LLP and WongPartnership LLP, and global law firm Clifford Chance LLP.
The process of developing the VIMA involved an industry-wide consultation and collaboration by more than 30 venture capitalists, domestic and international law firms, Singapore agencies (including the Law Society) and Silicon Valley firms operating in the region, taking place over a number of round-table discussions and consultation sessions. These discussions and sessions with various stakeholders have helped to ensure that the VIMA represents a pragmatic set of contracts that balances the interests of both the investor and the company, which help to reduce the scope of open issues requiring negotiation between the parties and thereby allowing parties to reach common ground more quickly.
Q. Have standard form contracts for the VC industry been introduced in other jurisdictions? What has the response been?
Several years ago, the National Venture Capital Association (NVCA) in the United States began a project to standardise venture capital financing documents to combat what it termed as “the venture industry’s expensive and inefficient process of “re-inventing the flat tire” on a daily basis” 2National Venture Capital Association, “Model Legal Documents”, <https://nvca.org/resources/model-legal-documents/> (accessed 8 April 2019) . By providing an industry-embraced set of model documents that could be used as a starting point in venture capital financing, the NVCA anticipated that the time and cost of financing would be greatly reduced and that all principals would be freed from the time consuming process of reviewing numerous pages of unfamiliar documents and instead focus on the high level issues and trade-offs of the deal at hand.3Ibid
Since its launch, the NVCA model document project has been a huge success and its model documents have reduced the costs and cycle times associated with venture financings. Following from the NVCA’s success, standardised documents for early stage venture capital investment have been developed in other countries, including in the UK under the auspices of the British Private Equity and Venture Capital Association and closer to home by the Australian Investment Council.
Q. Are the VIMA documents applicable for all VC financing deals?
Whilst the VIMA documents may not suit every company or investor completely (and they are not intended to as each investor will have their own “house rules”, and each company and the entrepreneurs/founders themselves will also have other matters that are important to them), they should serve as a useful guide as to how an early round of funding is often structured.
In general, the VIMA documents aim to:
- reflect and, in certain instances, guide and establish current industry norms;
- strike a reasonable balance among the investor, the company and the founders/entrepreneurs;
- present a range of alternative options, reflecting a variety of financing terms;
- promote consistency among transactions; and
- reduce transaction cost, time and unnecessary friction among the parties.
The documents also contain a number of annotations with detailed drafting notes to explain important legal and commercial concepts and includes a lexicon for first time venture capitalists and entrepreneurs.
Q. What documents form the VIMA suite?
The documents pertain to Series A VC financing transactions, and angel or seed round investments. As mentioned, the VIMA documents have been drafted based on Singapore law, and therefore incorporate Singapore law as the chosen governing law and Singapore as the chosen dispute resolution forum. They include:
- The “CARE” (Convertible Agreement Regarding Equity) which can be used where an investor is making a cash investment in a Singapore incorporated private company, in exchange for receiving either shares in such company or cash upon occurrence of certain events. The CARE is based on the same concept as the industry recognised “SAFE” (Simple Agreement for Future Equity) document used in the US, which is intended to provide a lower-cost, faster alternative to convertible debt financing.
- A term sheet that outlines the key terms of the investment pursuant to which an investor (or group of investors) will eventually subscribe for shares in a company along with the ongoing rights and obligations of the investors, founders and the company in relation to such company.
- A NDA (Non-Disclosure Agreement) that can be used on occasions where a company is providing confidential information about itself to a potential investor looking to invest in such company and the investor is open to signing such a NDA.
- Long-form and definitive documents including the Subscription Agreement that sets out the terms and conditions pursuant to which an investor (or group of investors) will subscribe for shares in a company and a Shareholders’ Agreement that sets out the key terms and conditions regulating the affairs of the company and the rights and obligations of the investors and founders as shareholders of the company.
- In addition, the VIMA suite includes a Venture Capital Lexicon which sets out the terms which are commonly used in an early stage financing round, to provide founders and seed investors with general information and explanations on the terminology used in funding rounds.
It is important to note that the Term Sheet, the Subscription Agreement and the Shareholders’ Agreement include options and rights that are more suitable for a Series A funding round (as opposed to a seed funding round), and are drafted on the following assumptions:
- An investor (or a group of investors) is (are) making a significant minority investment in an early stage company incorporated in Singapore.
- The investment instrument is Series A preference shares.
- The documents are governed by Singapore law with Singapore being the forum for any dispute resolution.
Significant amendments may be required to the Term Sheet, the Subscription Agreement and the Shareholders’ Agreement included in VIMA to the extent they are to be used for a seed funding round.
Q. Do these model form agreements mean that VCs and start-ups can now enter financing agreements without engaging the services of a lawyer?
No. The contracts in the VIMA provide only a starting point for discussion and the relevant documents should be tailored to meet the specific legal and commercial requirements of the contemplated transaction. No document or information provided in the VIMA should be construed as legal advice (including for any fact or scenario described in such documents or any assumptions made in relation to such documents). Additional documents may be required for the contemplated transaction. Legal and tax advice should be sought before using these documents.
Q. How can lawyers contribute and be part of the VIMA initiative?
We encourage lawyers to partner with the SAL and the SVCA by using the VIMA and by so doing, support the adoption of Singapore law and Singapore dispute resolution platforms, which are embedded in the VIMA. It will be good if lawyers can use the VIMA as a starting point to negotiate their VC deals or invite their clients to consider the VIMA as it presents a fair and balanced approach.
We also welcome any feedback from lawyers who have used the VIMA in their deals, and suggestions on refinements that should be made to the existing VIMA documents or additional agreements or documents that could be considered for further development of the VIMA suite.
Q. How will SAL and SVCA drive the adoption of these model agreements?
We currently have a three-pronged approach to increasing awareness and encouraging adoption of the VIMA in 2019. This approach includes organising a series of marketing events, publishing a guidebook and conducting feedback sessions.
The marketing events are targeted specifically at the end-users which are start-ups and entrepreneurs. We are working through Government agencies, accelerators and incubators to organise talks and teach-ins to socialise the VIMA with start-ups and entrepreneurs. In parallel, we are reaching out to the lawyers, accountants and others involved in the start-up ecosystem to organise talks and events that will be of assistance to the start-up community.
We are also in the process of putting together an expert guidebook on early stage financing for start-ups. The guidebook will be an educational piece and cover a comprehensive range of topics including what to expect in the early stage fundraising process, valuation and taxation issues, key issues from the perspective of a venture capitalist and a start-up in early stage financing. It will also include specific articles on the usage of VIMA and its applicability in regional fundraising. We aim to complete the guidebook by the end of the year and make it freely available online on the SAL and SVCA websites. We are extremely grateful to the law firms, accounting firms, VC investors and many others who have come forward and agreed to contribute articles to this guidebook.
Finally, we plan to organise a feedback session, probably sometime in the second half of 2019, to hear from the law firms and other agencies who took part in our consultation sessions on their experience in using the VIMA and any suggestions for improving the documents. We also intend to use this feedback session to solicit further suggestions on how the VIMA suite can be further enhanced.
A law firm’s experience with the VIMA
“We found the VIMA to be helpful in a recent deal where we had advised the founders of a local start-up during a seed-funding round. It was a useful starting point for us in our preparation of the necessary transaction documents, allowing our client to reap the following benefits:
- the VIMA documents are comprehensive in their coverage of key legal terms typically found in the definitive agreements of early-stage financing transactions. This enabled parties to enter into negotiations already having a common understanding as to the general structure of the definitive agreements and to focus their efforts on negotiating deal specific legal and commercial terms;
- there was a net reduction in time taken to prepare the definitive agreements (thereby a net reduction in legal costs incurred by the client); and
- we were able to focus our time in ensuring deal specific clauses are drafted accurately to reflect the commercial agreement between parties (e.g. the terms of the various classes of shares, the governance rights, etc.).
A model constitution reflecting the terms of the template shareholders agreement can be a useful future addition to the VIMA set of documents.
I commend the Singapore Academy of Law and the Singapore Venture Capital and Private Equity Association for rolling out the VIMA initiative, which I believe is increasingly relevant, especially in light of the Finance Minister Mr. Heng Swee Keat’s recent mention during the 2019 Budget of the high number and aggregate value of venture capital deals taking place in Singapore annually (i.e. over 220 deals amounting close to S$4.2 billion in total value). VIMA may potentially make the process of preparing the necessary legal documentation more cost efficient for start-ups and investors alike. From the perspective of early stage starts-up which are invariably cost-conscious, this is certainly good news.”
“Whilst it may feel counter intuitive to practitioners that they are essentially giving up the bulk of the fee-generating component on a deal, I think it is actually cathartic. It gets lawyers to focus on high value adding aspects. We cannot avoid the ongoing standardization and commoditization of templates in the legal industry. We must embrace it as a tool for us to up the ante and at the same time subtly promote Singapore law as a standard bearer for regional transactions.”
Managing Director and Head of Corporate Finance
Duane Morris & Selvam LLP
|↑ 1.||Chief Justice Sundaresh Menon, Opening Address at SAL 30th Anniversary Appreciation Dinner (23 October 2018), <https://www.sal.org.sg/Newsroom/Speeches/Speech-Details/id/742> (accessed 8 April 2019)|
|↑ 2.||National Venture Capital Association, “Model Legal Documents”, <https://nvca.org/resources/model-legal-documents/> (accessed 8 April 2019)|