Having counseled investors through dozens of venture transactions in New York and beyond, I can say with confidence that due diligence isn’t a checkbox exercise. It’s the process of stress-testing every material assertion made during the fundraising process and, just as importantly, surfacing the risks that never made it into the deck.
What follows is
Special purpose vehicles were always the sort of tool investors used only occasionally, in special circumstances. A hot deal. A founder who didn’t want 100 angels on the cap table. A one-off opportunity that didn’t quite fit inside a fund’s mandate. SPVs were the exception.
In 2025, they stopped being that. As Forbes put it
The National Venture Capital Association’s October 2025 update to its model stock purchase agreement didn’t make headlines outside the venture bar, but it quietly did something meaningful: it formally incorporated tranched financing mechanics into the model documents. That might sound like a technical tweak, but it’s actually a recognition of how common milestone-based investments have
When negotiating convertible notes, parties typically focus on the terms of conversion upon an equity financing, most notably the discount and valuation cap. This is understandable inasmuch as the not-so-hidden secret of convertible notes is that no one wants the notes to ever get paid. The investors are not seeking interest on their investment. The goal is for the company to attract venture capital investors in the near future, do a priced round and then to have the notes convert into that round at a discount.
Not enough attention, however, is paid to what happens upon maturity, assuming a qualified financing, non-qualified financing or corporate transaction has not occurred that would result in conversion prior to maturity. As a general matter, three possible scenarios could occur upon maturity of a convertible note: conversion into common, repayment of the note and extension of the maturity date.
A recent case in Delaware involves a dispute between a company and its convertible note investors over the noteholders’ rights upon maturity. The case serves as a cautionary tale to investors and companies alike as to the importance during the negotiation process of paying close attention to what happens upon maturity. At the risk of getting tedious, the background details are worth reviewing.
Continue Reading Beyond the Discount: Why Maturity Terms Matter in Convertible Notes
I’m often asked by clients whether startups should have a separate stockholders’ agreement among the founders. The answer largely depends on whether they have or will have certain other startup documents in place.
First, some background on stockholders’ agreements. These are contracts entered into by owners of privately held companies to manage the following governance and ownership issues:
I had a chance to sift through Pitchbook’s U.S. VC Valuations Report for the first quarter of 2024. The data point that really jumped out at me was the increase in down rounds. The number of flat and down rounds as a proportion of all VC deals has been rising consistently since the first quarter of 2022, reaching 27.4% of all VC deals in Q1 2024, the highest level in ten years.
Startling, but predictable. Companies raised capital during the venture frenzy of 2020 and 2021 at high valuations. Many startups that had since failed to reduce their cash burn when the fundraising market turned sour in mid-2022 are now facing the prospect of having to raise capital at a discount to their last valuation.
This trend has implications for founders, investors and companies, as down rounds can trigger anti-dilution provisions, dilute existing shareholders and create challenges for companies seeking to raise additional funding. And there’s reason to believe the worst is not yet behind us. The incidence of down rounds during historic bear markets indicates there is still plenty of room for valuations of venture-backed companies to fall further. The rate of down rounds in the aftermath of the 2008 financial crisis rose to nearly 36% of venture deals, which was actually dwarfed by the 58% of deals during the dot-com bust.
Continue Reading Navigating the Downside: The Rise of Down Rounds in 2024 VC Deals
In the world of venture capital, there are certain investor rights that ensure the smooth execution of exit transactions. The primary such mechanism is the drag-along provision, under which one group of stockholders agrees in advance to sell or vote their shares in a sale of the company approved by another group of stockholders and/or by the board. Drag-along provisions often include a covenant by the drag-along shareholders not to sue over a drag-along sale, often including waivers of claims for breach of fiduciary duties. But are fiduciary duties of directors too important to allow them to be waived by stockholders? A recent Delaware Chancery Court decision puts guard rails on such waivers.
Continue Reading Too Big to Waive? Enforceability of Drag-Along Covenants Not-to-Sue
A major theme of this Blog has always been ongoing legislative, regulatory and market initiatives to reform capital markets by targeting unreasonable or outdated impediments to capital formation to make it easier for early-stage companies to raise capital. These impediments are not always obvious or direct. One such indirect impediment has been the venture capital adviser exemption under the Investment Advisors Act of 1940, the eligibility requirements of which disincentivize VC investment in secondary transactions and in other VC funds, thereby unnecessarily hampering liquidity in the innovation ecosystem. If a new piece of proposed legislation passed by the House Financial Services Committee becomes law, however, this impediment will be eliminated.
Continue Reading Proposed Reform of Venture Capital Fund Advisor Exemption Will Boost Startup Investment and Founder Liquidity
The collapse of Silicon Valley Bank will have enormous repercussions for startups and VCs in ways seen and unseen. As for the unseen, SVB had deep relationships among the various players in the venture ecosystem. Founders and investors established banking relationships with SVB in part because of the opportunities SVB provided to network within the space. It will be difficult for other lenders who don’t have these deep relationships to replace SVB in this capacity and fill this valuable role.
Continue Reading Bumpy Ride Ahead for Startups After Silicon Valley Bank CrashTwo startups with competing, equally compelling technologies at the same stage of development are pitching venture
capital investors for Series A funding. One startup is led by a serial entrepreneur founder, the other by a novice. Assume each will get funded. In all likelihood, the deal will happen quicker and the amount funded and pre-money