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BVCA Model Docs - What Founders should know

In February 2023, the BVCA brought out their latest set of Series A model investment documents (‘the Model Documents”).

Interestingly, the BVCA explicitly states that they are not suitable for seed and earlier rounds. Despite this, I have observed their growing use in seed (and even pre-seed) investments. In this short article I’ll highlight some key issues Founders should look out for in these Model Documents and explain why they might not be a suitable template for seed and pre-seed investment rounds. For reference, you can find the suite of documents here.

Definition of “Investors” and “Major Investors”

From the outset, the Model documents define “Investors” as those owning “Series A” shares. As you would imagine, a vast swathe of control/consent and information rights are reserved only to those meeting this definition and usually exclude the Founders and any existing investors.

In addition, the documents also introduce a hierarchy with the concept of “Major Investors” who are defined as “Investors” owning above a certain percentage of the company. These Major Investors are granted specific control rights, such as pre-emption on new share issues and share transfers, which are not extended to other shareholders (more on this below).

The Case for Ordinary Shares and Consensus Driven Decision-Making

I always view early stage investing as a partnership with Founders. For this reason, I prefer to see pre-seed and seed investors coming alongside Founders in Ordinary Shares to maintain that sense of parity.

Furthermore, whilst I agree that investor consents form an important check and balance, I would advocate for a more consensus driven approach which includes the Founders, such that those consents require a sensible percentage of the overall equity to vote in favour. To avoid an unwieldy process, those consents should be kept to a short list of major matters to stop unfair prejudice of investors. Operational consents, like spending or debt decisions above certain threshold, can be left to an Investor Director or Observer (note to self: this person should be wisely chosen!).

Pre-Emption Rights

One of the biggest points of contention in the Model Documents is how pre-emption rights are dealt with. Here the statutory pre-emption rights (for new share issues) that exist in the Companies Act 2006 are permanently disapplied. Instead, pre-emption rights are reserved to Investors or Major Investors.

Whilst Founders often lack the funds to reinvest meaningfully in their own company, the idea of excluding them outright doesn’t seem right. The same issue arises where angels have backed a company in the early rounds. There is an issue of basic fairness but more than that: we all know that a start-up’s journey can be a rollercoaster that may well include some – shall we say – “difficult” terms in a funding round. Therefore, both an investor’s and Founder’s key protection with respect to the terms imposed by later investors is their pre-emption right to participate in later rounds. If that’s gone, the risk-reward for angels looking at pre-seed and seed is shifted materially.

In my own experience, this is the biggest issue with the Model Docs and where the most time is spent trying to negotiate a more equitable position. My personal view is simple: pre-emption rights are sacred!

Other Key Clauses to Watch

Founders should carefully review several other provisions in the Model documents, including:

- Anti-Dilution Protection: the Model Documents include broad-based anti-dilution provisions as standard.

- Pre-Emption Rights on Share Transfers: Founders should look carefully at matters such as pre-emption rights on share transfers as well as who has (and doesn’t have!) Co-Sale rights

- Drag-Along threshold: Consider whether the threshold % aligns with the post-funding realities of the cap table.

Final Thoughts

The growing use of the Model Documents in the very earliest funding rounds has been interesting to observe. However, as the BVCA itself states, these documents are not designed for this purpose and I do tend to agree.

Instead, for seed and pre-seed investments, Founders and investors alike should perhaps see these documents as a starting point and be prepared to negotiate terms that better reflect the realities of an early-stage partnership. Alternatively, there are many other sources of documents for pre-seed and seed funding rounds.

GenAI: “Land Grab or Bubble”

Early in November 2024 Cambridge Angels held one of its externally sponsored dinners; this time on GenAI: “Land Grab or Bubble”. Held at Clare Hall in Cambridge, it brought together 30 prominent academics, investors and corporate leaders active in this space.

With over 2 hours of discussions (with particular thanks to Ronjon Nag for his brilliant chairing) we have since been asked as to what its conclusions were. It would be impossible to extract a single answer but CA member, Simon Blakey did a post on some of the highlights that resonated for him and agreed that we could copy it here:

• One guest argued that AGI is here now; nobody talks about the Turing test anymore because we surpassed it. Another guest argued that this was not the case and LLMs are still only producing answers based on statistical probabilities. AGI requires abstract thought and LLMs cannot do this. They can’t reason and they have no working memory. The also don’t know how to forget.
• [It was also pointed out that self-awareness/consciousness had been debated since the time of Socrates, so we were unlikely to reach a definitive conclusion on where AGI was over dinner]
• One guest stated that LLMs are best suited where hallucination and a small amount of misinformation can be tolerated. In contrast, another guest argued that in materials science at least, hallucinations are not necessarily negative and could be used to help initiate new lines of research. An open question was also asked as to why we should hold AI to a higher standard of correctness than humans.
• One speaker thought that in 20 years there will be a path to read/write directly from computers to the brain
• The question was raised about how AI is impacting our brain. Eg there’s growing concern that children might be losing some capacity to develop and interpret micro-expressions particularly because of increased screen time. This led to a brief discussion around evolution but some guests argued that environmental evolutionary pressures have always been present on humans and AI was merely the latest of these
• Leading on from this, some discussion was had around the career changes that were being precipitated by the advent of AI, with one guest describing an interesting matrix where routine, repetitive, manual and cognitive jobs would be the first to go whilst those which were non-routine, creative and requiring a ‘human veneer’ (empathy, ethical judgement and personnel connection) would be around for longer and use AI primarily as an augmentation tool
• Some discussion was had around which market verticals investors should be focussing their attention and whether long-term value was within the increasingly commoditised LLMs or with the wrappers, training data or outputs. There was consensus that model outputs that could have IP protection, such as pharma molecules, would have real value.
• Finally, several open questions were raised; why are we wasting time and resources building AGI when our focus should be on climate and health? Can we use the tools we have now to solve these critical problems? Similarly to what extent will we use AI to make decisions for us? Will it extent to politics? Will we allow AI to decide about the best person to be in charge?

[and no, we did not discuss disinformation or the outcome of the US election…]

It was a brilliant example of the convening power of the Cambridge Angels network and we are now canvasing opinions for themes and sponsors for the next one

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Reforming the UK’s capital markets - 6 key points - Simon Thorpe

Simon Thorpe former Chair of Cambridge Angels and active angel investor, has shared his thoughts on the recently published Blair Institute report.

Early last week the Blair institute published a comprehensive and well researched report on reforming the UK’s capital markets. You can find their report here.

As an entrepreneur running my own business, a prolific angel investor in UK private companies and an ex UBS research analyst in the public markets, this report struck a chord with me.  

Why?  Because it underlines the importance of equity research, and because all of my successful angel investing exits have been via a trade sale to overseas corporate buyers.

20-30 years ago I would have expected at least some of these companies to float on London’s public markets and yet not one single company of mine has IPO’d. Of my current 35 company portfolio companies an IPO is sadly a distant prospect and a NASDAQ listing is much more likely because of the depth of growth capital and the much greater appetite for risk in the US. 

Unfortunately the declining number of growth companies listing in the UK is also driving a lack of highly experienced Chairs and NEDs with operational experience and ultimately this weakens the UK’s ability to build and grow companies of scale. Radical change is needed to address the UK declining capital market’s position

 For those of you who have not yet had the chance to read the report here are the 6 key points including recommendations.

1. The decline of UK Capital Markets:

• The UK’s public capital markets, including the London Stock Exchange (LSE), are facing significant challenges. The value of the LSE has been growing much slower compared to global peers like the US S&P 500 and the UK has slipped from being the world's largest stock exchange to sixth place.

• Institutional underinvestment, excessive regulatory burdens, and low liquidity are major reasons for the lack of success, particularly in attracting and growing high-tech companies.

2. Challenges for Scale-Ups:

• The report highlights three key challenges:

• Lack of institutional investment in large private and newly public companies with high growth potential.

• Barriers that reduce investment in smaller public firms.

• An unfriendly public listing environment for smaller firms due to low liquidity, limited professional-analyst coverage, and high compliance costs.

3. Loss of Tech Companies to Foreign Competitors:

• Many of the UK’s brightest startups are either relocating or being sold to foreign competitors due to these capital market issues. The report notes that the UK risks losing its ability to become a hub for high-tech companies unless substantial reforms are made.

4. Recommendations for Reform:

• Close AIM and reform LSE: Merge the Alternative Investment Market (AIM) into the LSE Main Market, creating a rapid route to listing for high-growth tech firms with specific tax and regulatory benefits.

• Improve IPO Environment: Revamp the Private Intermittent Securities and Capital Exchange System (PISCES) to support pre-IPO companies and attract institutional investment.

• Expand Venture Capital: The UK government should allocate £1 billion to invest in five growth-focused venture funds to support large-scale investment in pre-IPO companies.

• Cut Regulatory Red Tape: Simplify compliance and governance requirements for asset managers and smaller listed companies to reduce costs and encourage greater investment in high-growth sectors.

• Encourage Analyst Coverage: The government should act as an anchor purchaser to expand equity research coverage of smaller, high-growth companies, particularly in tech sectors.

5. Addressing Institutional Risk-Aversion:

• The UK’s pension and insurance systems are highly risk-averse, resulting in chronic underinvestment. In contrast, the US has driven growth through its pension funds and venture-capital ecosystems, which power the success of tech giants.

6. Lessons from Hong Kong:

• The report draws comparisons with the Hong Kong Stock Exchange, which successfully reformed its listing rules to attract biotech and life sciences companies. It suggests similar targeted reforms to attract innovative companies in the UK.

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