Borenius’ Tech Blog – Time for Another Series Seed Repair Kit?

Series Seed templates, the set of standardised investment documents managed by the Finnish Startup Foundation, were initially adopted in 2010 and have since been updated in 2016 and 2020, with minor updates in 2021. The surge of foreign capital into Finnish startups since 2021 in particular has had a clear impact on local deal terms, but the Series Seed templates have not kept pace. Time for another repair kit?

The Series Seed SHA in particular is widely used in Finnish pre-seed and seed rounds, with many local VC investors having adopted their own tweaked templates based on the common model documents. Investors' own templates and the increasing involvement of foreign investors in Finnish startups mean, however, that the Series Seed SHA no longer lives up to its core purpose: the ability to serve as a set of standard deal terms that parties may adopt without extra hassle or lawyering. This is what the ecosystem is accustomed to in the BVCA templates in the UK and the NVCA templates in the US, which enjoy broad and consistent backing from the industry, and something we should have here as well.

What to repair then? The merit of Finnish contractual practice is that we use compact terms. We do not need a set of documents where the number of pages exceeds three digits. So, adding complexity to the liquidation preference waterfall, implementing two-tier investor information rights or including additional drag-along, tag-along or exit provisions is not needed. Such terms may be common but are also technical and easy to implement, if needed. That said, compactness should not come at the cost of clarity. There are a handful of points where the current template leaves too much to interpretation or simply reflects outdated market practice. On such points, targeted additions are warranted. Below are a couple of examples of terms that need rethinking:

(i) Founders' Transfer Rights: The Series Seed SHA provides for a founder lock-up for a fixed period, after which the shares are transferable subject to right of first refusal and tag-along. Investors are not super keen on this, and, on reflection, nor should the founders be. A unilateral right to transfer after the lock-up adds little value for founders in practice and introduces unnecessary friction for everyone else. Meaningful founder liquidity in the Finnish market is almost always delivered through a structured secondary alongside a new financing round. The template should be updated to reflect this reality: founder transfers should require investor consent throughout the life of the agreement.

(ii)   Bad Leaver's Vested Shares: The Series Seed SHA provides that founders may retain their vested shares upon a bad leaver event. This is neither market standard nor in the interest of any party. Should there be a bad leaver, investors want to reallocate those shares in the cap table – and increasingly, co-founders agree. If plans change for a teammate early on, it is better for the company that the departing founder does not retain a significant stake without any ongoing commitment to back it up. The same logic applies to good leaver events.

(iii) Material Breach: The Series Seed SHA should define what constitutes a material breach. This is primarily a founders' protection point: the remedy for material breach is redemption of shares at a discount, and the current template gives no guidance on what conduct gets you there. Does a founder moonlighting on a side project trigger it? What about breach of confidentiality? A common understanding in the market is that shares may only be taken out due to a material breach if one of the two fundamentals – transfer restrictions or the steps needed for exit – are breached. The current template does not say this. It should.

Certainly, there are also minor points to address. Should all shareholders have a pro rata right in future financing rounds when the SHA may in future include dozens of employees through an ESOP? Extending pre-emption rights to employee shareholders is an administrative headache and misses the point – employees acquire their stake through the incentive programme itself, not through participation in future rounds. On ESOP more broadly, the template should address threshold mechanics and what happens to forfeited equity incentives, both of which are standard features of negotiated SHAs and genuinely affect the cap table over time.

Two final points round out the list: the allocation of transaction costs on exit – which party bears them and whether they may be deducted from proceeds – and the company's ability to be the purchaser where shares are subject to redemption. None of these points requires complex drafting, but each of them matters in practice.

If you have any questions regarding this blog post, don't hesitate to contact our Venture Capital & Growth Equity team.