1.1 Key Entities
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1.2 VC Fund Agreements
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Decoding the Docs: Inside Key VC Agreements
The complex activities and governance of a Venture Capital fund require a robust legal framework established through several core agreements. These documents serve to delineate the rights, obligations, and financial terms governing the fund, its investors (LPs), the General Partner (GP), and the Management Company. We will examine three pivotal agreements that shape this structure: the Limited Partnership Agreement (LPA) governing the fund itself, the operating agreement defining the internal structure of the GP entity, and the agreement detailing the Management Company's advisory role and compensation.
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Details on each agreement are below.
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Limited Partnership Agreement (LPA)
Purpose and Scope: The Limited Partnership Agreement serves as the foundational contract between the General Partner (GP) and Limited Partners (LPs). It outlines the fund’s mission, term, capital commitments, and the distribution of proceeds. The Fund operates under a limited partnership agreement.
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Key Provisions:
The LPA typically includes management fees, carried interest calculations, hurdle rates, governance structures, and rules regarding capital calls and distributions. It clarifies the roles, responsibilities, and liabilities of both GPs and LPs including:
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Fund Term and Extensions: Specifies the fixed operational lifespan of the fund (e.g., 10 years from the final closing) and outlines the conditions and procedures under which the General Partner (GP) may extend this term, often requiring LP consent or LPAC approval for longer extensions.
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Capital Commitments: Clearly defines the total capital amount each Limited Partner (LP) agrees to contribute to the fund over its life.
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Capital Calls (Drawdowns): Details the mechanism by which the GP requests portions of the LPs' capital commitments. This includes notice periods, calculation methods (pro-rata based on commitments), limitations on the amount called, the purposes for which capital can be called (investments, fees, expenses), and consequences for LPs failing to meet a capital call.
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Investment Period: Defines the specific timeframe (e.g., first 5 years of the fund term) during which the GP is permitted to make new portfolio investments using the committed capital.
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Management Fees: Outlines the calculation, frequency, and payment terms of the fees paid by the LPs to the GP for ongoing fund management. This is typically a percentage (e.g., 1.5%-2%) of committed capital during the investment period, potentially stepping down to a percentage of invested capital thereafter.
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Distribution Waterfall: Establishes the precise order and priority for distributing proceeds generated from investments. This typically includes:
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Return of Capital: Repayment of LPs' contributed capital related to the investment(s) generating proceeds, plus sometimes fund-level expenses and fees.
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Preferred Return (Hurdle Rate): A minimum annual rate of return (e.g., 8%) that LPs must receive on their invested capital before the GP earns carried interest.
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GP Catch-Up: A mechanism where the GP receives a high percentage (often 80-100%) of distributions after the preferred return is met, until the GP has received its agreed-upon carried interest percentage (e.g., 20%) on cumulative distributions above the initial capital return.
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Carried Interest Split: The final allocation of remaining profits between LPs (e.g., 80%) and the GP (e.g., 20% carried interest).
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GP Commitment ("Skin in the Game"): Specifies the amount and terms of the capital the GP principals themselves commit to the fund, demonstrating alignment with LPs.
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GP Authority, Duties, and Limitations: Defines the broad authority granted to the GP to manage the fund, source and execute investments, manage portfolio companies, and incur necessary expenses. It also outlines the GP's fiduciary duties (e.g., duty of care, duty of loyalty) and any specific limitations on their activities (e.g., restrictions on transaction size, borrowing limits, geographic focus).
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LP Rights and Limited Liability: Confirms LPs' status as passive investors with limited liability (generally restricted to their committed capital), clarifies their rights (e.g., access to information, voting on certain major issues), and explicitly prohibits them from participating in active management to preserve their limited liability status.
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Limited Partner Advisory Committee (LPAC): Describes the formation, composition, and role of the LPAC (if any), which typically consults with the GP on conflicts of interest, valuation methods, and certain consent matters.
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Reporting and Valuation: Specifies the frequency (e.g., quarterly, annually) and content of reports the GP must provide to LPs (e.g., financial statements, portfolio valuations, capital account summaries, narrative updates). It also details the valuation policies used for assessing portfolio investments.
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Key Person Clause: Identifies essential GP team members and defines triggering events (e.g., death, departure, reduced time commitment) that could lead to suspension of the investment period or other remedies, subject to LP consent to continue.
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Transfers of Interest: Outlines the highly restrictive conditions under which LPs or the GP may transfer their respective partnership interests, usually requiring GP consent for LP transfers.
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Indemnification and Exculpation: Details the extent to which the fund will indemnify (cover losses/expenses) the GP and its affiliates, and the extent to which the GP is exculpated (released from liability), typically carving out exceptions for gross negligence, fraud, willful misconduct, or material breach of the LPA.
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Dissolution: Specifies the events that trigger the winding down of the fund (e.g., end of term, specific LP vote) and the procedures for liquidation and final distributions.
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Importance: By delineating control rights and economic arrangements, the LPA establishes the operational framework that enables a transparent and well-regulated partnership.
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Samples / Templates:
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Institutional Limited Partners Association (ILPA) Model LPA - https://ilpa.org/ilpa-model-lpa/
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VC Labs The Cornerstone LPA - https://govclab.com/2024/02/04/cornerstone-lpa-v3/
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(Note: This is not legal advice. It's highly recommended to have any Partnership Agreement drafted or reviewed by legal counsel to ensure it meets the specific needs of the partners and complies with relevant state laws.)
02
General Partner Agreement
Purpose and Scope: The General Partnership Agreement (GPA) serves as the foundational contract establishing the relationship and operational rules among all General Partners involved in a business venture. It outlines the partnership's specific business purpose, its intended duration (term), the capital contributions required from each partner, the management structure, and the agreed-upon methods for allocating profits, losses, and distributions among the partners. The business legally operates under the terms defined within this GPA.
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Key Provisions: A comprehensive GPA typically details critical financial aspects such as partner capital contributions (initial and future), the agreed-upon methods for allocating profits and losses, and any specific partner compensation like salaries or draws. It also establishes the governance framework, defining management responsibilities, decision-making processes, partner authority and duties, and voting rights. Furthermore, the agreement outlines procedures for significant transitions, including the admission of new partners, the handling of partner departures (through withdrawal, retirement, death, including buyout terms), and the conditions and process for dissolving and liquidating the partnership, while often clarifying the joint and several liability inherent to this structure.
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Capital Contributions: Details on the amount, timing, and form (cash, property, services) of each partner's initial and potential future capital contributions.
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Profit and Loss Allocation: Specifies the formula or percentages by which the partnership's net profits and losses will be divided among the partners.
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Management and Decision-Making: Defines how the business will be managed, outlining the authority of individual partners, voting rights, procedures for making key business decisions, and meeting requirements.
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Partner Duties and Authority: Clarifies the specific roles, responsibilities, fiduciary duties, and limitations on the authority of each partner to act on behalf of the partnership.
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Partner Compensation: Addresses any salaries, draws, or guaranteed payments partners may receive in addition to their share of profits.
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Admission of New Partners: Outlines the process and conditions under which new partners can join the partnership.
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Withdrawal, Retirement, or Death of a Partner: Establishes procedures for handling a partner's departure, including buyout terms and valuation methods.
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Dissolution and Liquidation: Specifies the conditions and procedures for winding up the partnership's affairs and distributing remaining assets.
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Liability: While often defined by statute, the GPA may reiterate the principle of joint and several liability, where each partner can be held fully responsible for the partnership's debts and obligations.
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​Importance: By clearly delineating management authority, financial contributions, profit/loss sharing, and operational rules among all General Partners, the GPA establishes a vital framework for governance and economic alignment. It is crucial for minimizing potential disputes, ensuring operational clarity, and managing the shared responsibilities and liabilities inherent in a general partnership structure.​
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​(Note: This is not legal advice. It's highly recommended to have any Partnership Agreement drafted or reviewed by legal counsel to ensure it meets the specific needs of the partners and complies with relevant state laws.)
03
Management Company Agreement:
The Management Company itself typically operates under its own internal operating agreement. This internal document details the managing partners' responsibilities (including managing the firm’s brand, intellectual property, and vendors), outlines the company's operating budget, and dictates how the management fees received from the Fund are used to cover these operational expenses.
04
Investment Agreements With Portfolio Companies (Startups)
Early-stage investment documents – term sheets, convertible instruments, and equity financing agreements – are critical tools that set the foundation for a startup’s financing. From a venture capital fund’s perspective, these documents are strategic in nature: they outline economic terms and governance rights that safeguard the VC’s investment and shape the future relationship with the founders​.
Key provisions such as liquidation preferences (which dictate how exit proceeds are distributed and ensure investors recoup their capital first) provide downside protection and influence overall fund returns​. Clauses addressing dilution – for example, anti-dilution adjustments – protect investors from value erosion in future down-rounds​.
Likewise, governance terms (board seats, voting rights, and protective covenants) give investors a degree of oversight and control, helping align the company’s decisions with shareholder interests​. By using well-defined, standardized documents, venture investors can streamline deal structuring and focus negotiations on the most important terms rather than reinventing the wheel each round​.
In sum, the terms in these investment documents directly impact ownership percentages, decision-making power, and financial outcomes – all of which ultimately affect a VC fund’s risk exposure and potential returns on investment.
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Continue to the next section - VC Fund Lifecycle ->
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For Further Reading:​
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​United States – Standard Early-Stage Financing Templates
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​Y Combinator SAFE (Simple Agreement for Future Equity)
https://www.ycombinator.com/documents
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The SAFE is a widely used convertible equity instrument introduced by Y Combinator in 2013 as a founder-friendly alternative to convertible notes​. It allows startups to raise seed funding without an immediate valuation by converting into equity at the next priced round. Y Combinator provides several standardized SAFE templates (e.g. with a valuation cap, with a discount, etc.) which are available for download on its website​. The SAFE has become de facto standard for many U.S. seed-stage deals due to its simplicity and lack of interest or maturity obligations, and YC’s Safe User Guide offers further explanation for users of these forms​.
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Convertible Note Agreements
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Convertible promissory notes are a traditional convertible debt instrument used at pre-seed and seed stages. Like SAFEs, they allow investors to convert into equity in a future round, but as debt they accrue interest and have a set maturity date. Standard convertible note templates typically include a conversion trigger (qualifying financing), a valuation cap and/or discount on the conversion price, an interest rate, and a maturity date for repayment if no conversion occurs​ Many law firms and accelerators have published sample convertible note documents; for example, 500 Startups’ KISS includes a convertible debt form (with optional interest, discount, and valuation cap)​, and organizations like NACO in Canada have adapted note templates for local us. These notes are favored for their flexibility, but they do introduce debt-like features (interest, potential repayment) that SAFEs avoid.
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​Series Seed Equity Documents –
Series Seed is a set of simplified equity financing documents that emerged as a standardized template for priced seed rounds. Initially formulated around 2010 (with contributions by venture lawyers and investors), the Series Seed documents typically include a term sheet, stock purchase agreement, charter (certificate of incorporation) provisions for the new preferred shares, and investors’ rights terms, but in a much shorter, stripped-down form compared to traditional Series A docs. The rationale was to reduce legal complexity and cost for smaller financing rounds. These templates gained popularity after being open-sourced, and inspired similar efforts in other markets – in fact, the pan-European SeedSummit term sheet was directly “inspired by the Series Seed docs of the USA”​. Today, law firm platforms (like Cooley GO and others) provide generators that produce Series Seed documents based on these standards. While not an official governing-body-issued standard, Series Seed has become a common starting point for equity rounds between angel/seed investors and startups that are big enough for an equity round but want to avoid the full NVCA complexity.
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NVCA Model Financing Documents (Series A/B)
https://nvca.org/model-legal-documents/
For priced equity rounds (Series A, Series B and later), the National Venture Capital Association (NVCA) publishes a suite of Model Legal Documents that has become the industry standard in the U.S. venture community​. This comprehensive set includes templates for the Term Sheet, Stock Purchase Agreement, Charter (Certificate of Incorporation), Investors’ Rights Agreement, Right of First Refusal and Co-Sale Agreement, Voting Agreement, and other ancillary documents typical in a venture financing​.
The NVCA updates these model documents periodically to reflect evolving market norms and legal developments (e.g. changes in Delaware corporate law)​. They also include valuable commentary and multiple alternative clauses to cover various deal terms. The strategic importance of the NVCA templates is that they establish common language and expectations for major deal terms while striving to avoid bias towards either the company or the investors​.
Using NVCA models can reduce negotiation time and legal fees, since many VCs and attorneys are already familiar with their structure. (The Canadian Venture Capital Association has even adapted the NVCA documents for Canada, underscoring their influence.) Common VC terms – from liquidation preference details to anti-dilution provisions and governance covenants – are all spelled out in these standardized equity documents.
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Additional Resources and Commentary
Selecting and understanding the right template is only part of the process – both founders and investors benefit from understanding the implications of each clause. There are numerous guides and commentaries available to help navigate these documents:
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Term Sheet and Document Guides - Venture lawyers and investors have authored many explainers on term sheets and financing terms. For example, Brad Feld’s famous blog series on “Term Sheets” breaks down each major clause from an entrepreneur’s viewpoint. Similarly, platforms like Silicon Valley Bank’s startup insights and Carta’s guides offer plain-English definitions of terms (e.g. liquidation preference, vesting, anti-dilution) and their impact​. These resources emphasize that seemingly small differences in wording can significantly affect control or economics – hence understanding terms is crucial. Founders are advised to familiarize themselves with how protective provisions or participation rights work, for instance, as these can influence future fundraising flexibility and exit outcomes​.
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Comparative Analyses – When choosing between instruments like SAFE vs. convertible note vs. equity, it helps to see comparisons. One notable example is Rubicon Law’s side-by-side comparison of the Y Combinator SAFE and 500 Startups KISS, which highlights key differences in conversion conditions, maturity, and investor rights​. Such analyses conclude that SAFEs are slightly more company-friendly (no interest, no fixed term), whereas KISS notes may offer investors more protection (like the ability to demand repayment at maturity or receive information rights)​. Likewise, law firm whitepapers often compare UK vs. US term sheets or Germany vs. US deal terms, shedding light on local market conventions (for instance, explaining that German deals might routinely include liquidation preference and participation, whereas in the US those are often mutually negotiated alternatives). These comparative guides are valuable for international investors and companies navigating unfamiliar jurisdictions.
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Template Repositories – Many of the organizations mentioned (YC, NVCA, BVCA, CVCA, NACO, SeedSummit, etc.) host the templates on their websites for free download. For convenience, law firms sometimes bundle these into automated document generators (e.g. Cooley GO’s document generator can produce SAFEs or Series Seed equity docs with customized inputs, and Bird & Bird’s tool for German term sheets as noted). Always ensure you’re using the latest version of a template – for example, Y Combinator updated its SAFE in 2018 to a “post-money” version with important changes to how ownership is calculated​. Each template often comes with annotations or a user guide to explain the rationale behind key terms. Reading these notes (such as the NVCA’s commentary embedded in its model docs​
nvca.org or the explanatory footnotes in the BVCA agreements) can greatly enhance one’s understanding of how seemingly boilerplate terms may be negotiated for a specific context.
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Resources for Other Countries:
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Canada
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Canadian Startup Convertible Loan and SAFE Templates and Resources
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https://nacocanada.com/commondocs
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Includes a Convertible Loan and The Canadian Simple Agreement for Future Equity (SAFE). It is modelled after the Y Combinator SAFE. In this template a cap, a discount, and a maturity date were added to make it more appropriate for the Canadian market.
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The Canadian Venture Capital & Private Equity Association (CVCA)
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https://www.cvca.ca/resources/model-legal-documents
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United Kingdom and Europe – Standard Templates
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SeedSummit Standard Term Sheets (Europe)
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In Europe, a notable effort to standardize early-stage deal terms came from the SeedSummit initiative (a group of European seed funds and accelerators). In 2011, SeedSummit published two “reader-friendly” model term sheet templates with broad investor backing​. One was a generic SeedSummit Term Sheet for early-stage equity rounds, and the other was an EIS-friendly variant tailored for UK deals that need to comply with the Enterprise Investment Scheme tax requirements​. This was an unprecedented collaboration of 20+ European investors agreeing on common terms. The goal was to reduce the time and cost of negotiations for seed deals and create greater transparency and consistency across European venture transactions​. The templates, inspired by the U.S. Series Seed documents, cover the essential terms (valuation, investment size, liquidation preference, founder vesting, board composition, etc.) in a simplified term sheet format. They have since been updated and translated for use in multiple jurisdictions (for example, variants of the SeedSummit term sheet have been adapted for countries like Germany, France, Croatia, etc., often supported by local VC associations or law firms). For founders and investors, these provide a baseline to work from – though of course, parties may still adjust terms, the existence of a standard term sheet helps set expectations (e.g. 1x non-participating liquidation preference, typical protective provisions, and so on are pre-defined).
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Advance Subscription Agreements (UK – SEIS/EIS)
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https://www.ashfords.co.uk/insights/downloads/template-advance-subscription-agreement
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In the UK, Advance Subscription Agreements (ASA) have become a common template for seed funding, particularly to accommodate the SEIS/EIS schemes (Seed Enterprise Investment Scheme and Enterprise Investment Scheme) which provide tax relief to investors. An ASA is a simple agreement for future equity, much like a SAFE, with the key distinction that it’s structured to meet HMRC requirements (for instance, it is not debt, has no interest, and must convert to shares within a certain timeframe) so that investors can still qualify for SEIS/EIS tax relief​ Multiple sources offer ASA templates: for example, law firms (like Ashfords LLP and others) and startup platforms have published standard forms intended to be SEIS/EIS-compliant​. There are also variants like the Seedcamp ASA (Seedcamp being a UK seed fund) which was released to align with their standardized seed funding approach​. These agreements typically include the investment amount (advance), a conversion trigger (usually the next qualifying equity round or a long-stop date), any valuation cap or discount for conversion, and sometimes a headroom amount for additional advances. Using an ASA allows UK startups to raise money quickly (often from angels) without immediately issuing shares, while still ensuring the investors’ eventual shares can qualify for SEIS/EIS. It’s effectively the UK equivalent of a SAFE, and British Business Bank guidance notes that such convertible loan or subscription structures are popular for early-stage companies to delay valuation setting​.
British Business Bank Future Fund – Convertible Loan Agreement (UK)
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A recent and prominent set of documents in the UK came from the government’s Future Fund (launched in 2020 by the British Business Bank). The Future Fund used a standard Convertible Loan Agreement template for all its investments into startup companies, which effectively became a widely used convertible loan note template in the UK market​. This template (available publicly via the British Business Bank) was a balanced, halfway-house instrument: it carried interest and a maturity date like a note, but conversion was the intended outcome (into equity at a discount, or with a valuation cap, on a future financing round; or conversion at a discount on exit, etc.).
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​BVCA Model Documents (UK – Series A Equity)
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