NOTE: This is the thirteenth post in our series about standard terms in early stage equity financings. These posts refer to the model Series A Term Sheet put out by the National Venture Capital Association (NVCA) and available for download here.
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We finish up our discussion of the Investor Rights Agreement with a quick overview of the remaining provisions, which typically are not the subject of much negotiation.
Non-Competition and Non-Solicitation Agreements – Investors will almost always insist that the company’s founders and any other key employees agree not to compete with the company or solicit away any employees, customers or other key business relationships for 1-2 years after they leave the company for any reason. Of course, founders/employees have an interest in keeping the term of their restrictions as short as possible, but founders should also realize that as long as they are with the company (and usually they expect to be for a long time) they benefit if former employees are subject to non-compete and non-solicit restrictions for longer terms.
Non-Disclosure and Developments Agreement – In any financing with sophisticated investors, the company will be required to ensure that all persons who may have had access to the company’s confidential information or a role in the development of the company’s intellectual property agree that such information and intellectual property is confidential and belongs to the company.
Board Matters – This provision deals with membership on Board committees, the frequency of Board meetings, obtaining Directors & Officers (D&O) insurance and director indemnification. These matters are typically of little consequence and any issues should be left to the lawyers to hash out when negotiating the final transaction documents. The only thing worth noting is that the company should insist that any indemnification offered to the investors’ director(s) is provided to all directors, so that other directors may benefit from this protection as well.
Employee Stock Options – Employee stock options for technology companies typically vest over four years, with 25% of the options vesting after one year and the remaining options vesting monthly or quarterly over the following three years. As we noted in our post discussing the general Offering Terms, the size of the employee option pool is typically set at around 15-20% of the company’s fully-diluted capital post-financing, give or take a few percentage points, at the time of a Series A.
Key Person Insurance – Investors often require that the company take out life insurance policies on the founders on the theory that they are the driving force behind the success of the company and their death would dramatically reduce the company’s prospects.