Sriram Chakravarthi Senior Director & Chief Legal Counsel Singapore Academy of Law

Doris Yee Director Singapore Venture Capital & Private Equity Association

This article was published in the June 2019 issue of the Law Gazette under the title "Start-up Lawyering – The VIMA Approach". It provides an insight to the background and purpose of the Venture Capital Investment Model Agreements ("VIMA") and includes feedback from a law firm on their experience of using VIMA.

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 (VIMA).

Sriram Chakravarthi, Senior Director at SAL, and Doris Yee, Director at SVCA, answer questions about VIMA and how it helps to facilitate faster and more efficient VC investments for start-ups and investors.

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 were over 220 venture capital deals per year in Singapore worth close to US$4.2bn 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 was a lack of an industry standard in Singapore and the Southeast Asian region for venture capital (“VC”) financing documentation. To address this issue, SAL and SVCA launched VIMA in October 2018.

The intention of 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 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 investor and entrepreneur.

“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.” – The Honourable the Chief Justice Sundaresh Menon at the launch of VIMA in October 2018

Q. How does VIMA drive the adoption of Singapore law?

There is growing acceptance in the Southeast 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 Southeast Asian region. This would in turn further enhance Singapore’s status as a regional VC financing hub.

To drive adoption in Singapore and the region, the VIMA documents have been made freely available on the Singapore law website at www.singaporelawwatch.sg and on SVCA’s website at www.svca.org.sg

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 VIMA documents.

Q. What was the process behind VIMA’s development?

VIMA is an example of a ground-up initiative by the legal industry. The project was jointly undertaken by 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 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 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”.[1] By providing an industry-embraced set of model documents that could be used as a starting point in venture capital financing, 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.[2]

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 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 VIMA documents applicable for all VC financing deals?

Whilst 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, 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, 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 Convertible Agreement Regarding Equity (“CARE”) 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. CARE is based on the same concept as the industry-recognised Simple Agreement for Future Equity (“SAFE”) 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 Non-Disclosure Agreement (“NDA”) 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’ Agreementthat 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 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 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.

We hope that start-ups and investors will find the VIMA a useful tool. We welcome your feedback on your experience in using VIMA and any suggestions for improving the documents. We also welcome your suggestions on how the VIMA suite can be further enhanced.

To download the VIMA, please click here.  To provide your feedback or suggestions, please email to [email protected].

A law firm’s experience with VIMA We found 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: (a) 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; (b) 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 (c) we were able to focus our time in ensuring deal specific clauses are drafted accurately to reflect the commercial agreement between parties (eg, 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 (ie, over 220 deals amounting close to S$4.2bn 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 start-ups which are invariably cost-conscious, this is certainly good news. Matthew Poh, Associate, Selvam LLC (2018) 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 standardisation and commoditisation 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. Krishna Ramachandra, Managing Director and Head of Corporate Finance, Duane Morris & Selvam LLP (2018)

ENDNOTES

[1] National Venture Capital Association, “Model Legal Documents” <https://nvca.org/resources/model-legal-documents/> (accessed 8 April 2019).

[2] National Venture Capital Association, “Model Legal Documents” <https://nvca.org/resources/model-legal-documents/> (accessed 8 April 2019).

AUTHORS Sriram Chakravarthi is Senior Director (Legal Development), Chief Legal Counsel and Data Protection Officer at the Singapore Academy of Law (SAL). As Chief Legal Counsel, Sriram is responsible for SAL’s legal and statutory compliance. As Senior Director (Legal Development), Sriram is responsible for spearheading SAL’s efforts in promoting the international profile of Singapore law and Singapore as a legal solutions hub. Prior to joining SAL, Sriram was an equity partner in the corporate finance practice of a leading Singapore law firm and was instrumental in growing the firm’s regional practice. Sriram holds bachelor’s degrees in Commerce and Law and obtained an LLM from Tulane University, USA. He completed the General Management Program at Harvard Business School in 2017.

Doris Yee has over 20 years of experience in venture investing and technology commercialisation. She has worked with entrepreneurs and investors and served as a Director on the Boards of portfolio companies in US (Silicon Valley), New Zealand and China. She was involved in the formation and served on the Investment Committees of venture capital funds iGlobe Partners and iGlobe Treasury. She has been involved with the Singapore Venture Capital and Private Equity Association (SVCA), the representative body for private equity and venture capital fund institutions in Singapore as Honorary Secretary since 2007. She currently assumes the duties of the Director heading the Secretariat. She is also an Adjunct Associate Professor at the National University of Singapore.

Disclaimer: This article is intended for your general information only. It is not intended to be nor should it be regarded as or relied upon as legal advice. You should consult a qualified legal professional before taking any action or omitting to take action in relation to matters discussed herein. This article does not create an attorney-client relationship and is not attorney advertising.

 

Published 29 May 2020