The market for growth companies in the United States continues to demonstrate resilience relative to global venture capital trends. The US remains the largest and most active venture capital market worldwide, supported by deep capital pools, a mature start-up ecosystem, and sustained leadership in frontier technologies such as artificial intelligence, biotechnology, and enterprise software.

Following a significant contraction in venture capital activity in 2022 and 2023, largely driven by higher interest rates, inflation and geopolitical uncertainty, the market began to stabilise in 2024. While overall deal volume has remained below peak levels, investment activity has shown signs of recovery, particularly in high-growth sectors such as artificial intelligence. This recovery has been uneven across regions: the United States has led in large-scale financings and AI-related investment, while Europe has remained comparatively resilient in climate and deep tech, and parts of Asia have experienced slower growth amid structural and regulatory challenges.

Emerging markets, including India and the Middle East, have continued to gain momentum, albeit from a smaller base.

US venture capital activity in 2025 was defined by a handful of outsized, headline-grabbing transactions that concentrated capital and exit value at the very top of the market. On the financing side, defence tech leader Anduril Industries raised a multibillion-dollar round to scale autonomous systems, while AI pure-play Safe Superintelligence secured one of the largest debut financings in history, underscoring investor conviction in frontier AI. Other notable mega-rounds included continued large-scale raises by OpenAI and Anthropic, each drawing capital at valuations well above prior cycles. Exit activity was similarly top-heavy, led by IPOs of CoreWeave, Klarna, Circle and Figma, which collectively marked a reopening of public markets for venture-backed companies. Meanwhile, large-scale M&A transactions, particularly in AI, cybersecurity, and infrastructure software, continued to deliver billion-dollar outcomes, with strategic buyers targeting category leaders to accelerate platform expansion.

Despite a period of global venture capital contraction, the United States continues to lead in both innovation and investment activity. Its depth of capital, concentration of leading technology companies, and continued strength in high-growth sectors position it at the forefront of global venture capital trends.

Over the past 12 months, the market for growth companies and venture capital transactions has undergone significant transformation, both in the United States and worldwide. The most prominent trends are a product of evolving financing conditions, innovative transaction structures, and consequential changes in deal terms, all shaped by macroeconomic pressures, shifting investor priorities, and sector-specific dynamics.

Financing conditions have tightened considerably. Globally, investors have become more selective, prioritising profitability and sustainable growth over rapid expansion. The era of abundant capital and lofty valuations has receded, replaced by heightened scrutiny and rigorous due diligence. Higher interest rates, inflationary concerns and geopolitical uncertainty have led venture capitalists and private equity investors to focus their resources on companies with proven business models, recurring revenue and clear paths to profitability. Early-stage start-ups, in particular, have faced greater challenges in raising funds, while growth-stage companies have seen funding rounds become smaller and more competitive.

Transaction structures have adapted to these new realities. Structured financing instruments such as convertible notes, SAFEs (Simple Agreements for Future Equity) and preferred equity rounds with enhanced investor protections have become increasingly common. Globally, milestone-based financing tranches and M&A earn-outs are more frequently used, especially in sectors such as biotech, healthcare and technology, where regulatory and commercial risks are pronounced. Investors are negotiating for greater control, including board representation, veto rights and anti-dilution provisions, to safeguard their interests in uncertain markets.

These trends have led to one particularly notable change in deal terms: valuations have become more conservative, with investors demanding lower pre-money valuations and larger equity stakes.

While European investors have sought to encourage a growing emphasis on environmental, social and governance (ESG) considerations in deal selection and terms, US investors as a group have been slower to act. With that said, US investors are increasingly requiring companies to meet certain sustainability and governance benchmarks as part of their funding agreements, and to report on progress and achievements as part of standard investor reporting obligations.

The past year has been characterised by more disciplined financing conditions, innovative transaction structures, and significant changes in deal terms across the United States and globally. These developments are a direct response to broader economic uncertainty, shifting investor priorities, and a renewed focus on sustainable growth and risk mitigation. As a result, venture capital and growth company transactions have become more complex, with investors and founders alike adapting to a new era of deal making.

Over the past 12 months, several industries have been at the forefront of venture capital activity in the United States. Technology, healthcare, fintech, biotech, artificial intelligence and consumer products have consistently attracted significant investor attention, reflecting both the maturity of these sectors and their ongoing potential for disruption.

A distinction can indeed be drawn between industries that see VC-backed company exits and those experiencing an increase in the number of financing rounds. Technology and fintech sectors, for example, have seen a higher frequency of exits due to their scalability, market readiness, and appeal to strategic buyers. Companies in artificial intelligence and enterprise software have also been prime candidates for exits, as larger corporations seek to acquire innovative solutions to enhance their own offerings. Some have grown so quickly that they have effectively bypassed the IPO stage and become too expensive to acquire even as they remain private.

Conversely, biotech and healthcare companies often undergo multiple financing rounds prior to IPO or acquisition due to lengthy regulatory approval processes and significant capital requirements associated with drug development and clinical trials. These sectors attract ongoing investment as companies progress through various stages of research and development, but exits typically occur later, once products have achieved later-stage regulatory milestones and/or commercialisation.

Consumer technology and media companies have also seen increased financing rounds, particularly as they scale operations and expand into new markets. However, exits in these sectors are often driven by acquisition rather than IPO, as established players seek to integrate new content, platforms or user bases.

In summary, technology, fintech, biotech, healthcare, artificial intelligence and consumer products have driven venture capital activity across the United States over the past year. While tech and fintech companies are more likely to see exits, biotech and healthcare firms tend to attract repeated financing rounds as they advance through development stages. This distinction underscores the varying capital needs, exit timelines and investor strategies across industries, shaping the landscape of venture capital activity at both regional and national levels.

Venture capital funds are typically organised as limited partnerships (LPs), with the fund itself structured as a partnership between a general partner (GP) formed as a limited liability company (LLC) and multiple limited partners (LPs). The general partner is typically an entity controlled by the fund managers and is responsible, together with a contracted management company and/or an investment adviser, also controlled by the fund managers, for making investment decisions and managing the day-to-day operations of the fund, while the limited partners are passive investors who contribute capital but do not participate in management.

Decision-making authority is generally vested in the general partner, with certain major “bet-your-company” decisions, such as amendments to the fund’s governing documents, extension of the fund’s term or removal of the general partner, sometimes requiring the consent of a specified percentage of the limited partners. The affairs of the fund are primarily governed by a limited partnership agreement (LPA), which sets out the following:

• rights and obligations of the general and limited partners;
• management fees;
• carried interest provisions; and
• other key terms.

Additional documentation may include subscription agreements, private placement memoranda (PPMs), and side letters with individual investors, but the LPA remains the central document governing the fund’s operations and internal governance.

Fund Principals typically participate in the economics of a venture capital fund through two primary mechanisms: management fees and carried interest. Management fees are annual fees (often around 2% of committed capital) paid to the general partner or management company to cover operational expenses and compensate the fund managers for their ongoing work. Carried interest is a share of the fund’s profits (commonly 20%) allocated to the general partner after the return of capital and a preferred return, if applicable, to limited partners. In addition, fund principals often invest their own capital in the fund as limited partners (the “GP commitment”), further aligning their interests with those of the limited partners.

In recent years, the number of continuation funds (ie, vehicles established to acquire one or more portfolio companies from an existing fund, often to provide additional time and capital for value creation) has increased. This trend reflects both the maturing of the venture capital industry and the desire for liquidity solutions for existing investors while allowing continued upside participation for those who wish to remain invested.

Key terms in venture capital fund documentation have evolved as market standards to enhance investor protection and governance. These include provisions for:

• limited partner advisory committees (LPACs), which provide oversight on conflicts of interest and key decisions;
• “key person” clauses, which allow investors to suspend commitments if designated fund managers are no longer involved;
• restrictions on related-party transactions; and
• limitations on fund expenses.

Other standard terms include:

• preferred return or hurdle rates;
• claw-back provisions to ensure fair distribution of profits; and
• restrictions on the general partner’s ability to amend fund documents without limited partner consent.

These market-standard terms are designed to balance the interests of fund managers and investors, promote transparency and mitigate potential conflicts of interest.

In the United States, venture capital funds are generally not regulated as investment companies under the Investment Company Act of 1940, provided they qualify for certain exemptions – most commonly the Section 3(c)(1) or 3(c)(7) exemptions. These exemptions allow funds to avoid registration as investment companies if they limit the number or type of investors and do not make public offerings. Instead, venture capital funds are typically structured as private investment vehicles and are subject to less onerous regulation compared to mutual funds or other registered investment companies.

While there is no specific legislation governing venture capital funds, they are subject to a range of securities laws and regulations, including the Securities Act of 1933 and the Securities Exchange Act of 1934, particularly regarding fundraising and disclosure requirements. Additionally, fund managers may be required to register as investment advisers with the Securities and Exchange Commission (SEC) or relevant state authorities, or file as exempt advisers (for example, under the “venture capital adviser exemption”). As a result, while venture capital funds operate within a regulatory framework, they are not subject to a dedicated fund statute or the full scope of investment company regulation, allowing for greater flexibility in their structure and operations.

The venture capital fund environment continues to evolve with several notable trends. There has been a rise in impact funds, which focus on generating both financial returns and positive social or environmental outcomes. These funds are increasingly popular among institutional investors and high net worth individuals seeking to align their investments with broader values. Fund-of-funds activity remains significant in the VC space, as these vehicles allow investors to gain diversified exposure to multiple venture funds, often providing access to top-performing managers and mitigating risk through diversification.

Government-backed VC funds also play a role in the ecosystem, with federal, state and local programmes supporting innovation and early-stage companies, particularly in sectors such as technology, life sciences and clean energy. Examples include the Small Business Investment Company (SBIC) programme and state-sponsored venture initiatives, which provide capital, co-investment or guarantees to stimulate private investment in targeted industries or regions.

To accommodate extended average holding periods for investments – reflecting the longer timeframes often required for portfolio companies to achieve liquidity events – funds have adopted several strategies. These include the use of continuation funds, which allow managers to transfer mature assets into new vehicles, providing additional time and capital for value creation while offering liquidity options to existing investors. Funds may also seek to negotiate longer fund terms, incorporate extension options into fund documents or structure follow-on investment vehicles to support portfolio companies through later stages of growth. These approaches help align fund structures with the realities of venture investing, where exits may take longer than the traditional 10-year fund life cycle.

The level of due diligence conducted by venture capital fund investors in the United States varies by financing stage but consistently aims to identify risks, validate business potential and ensure compliance. Each stage involves a progressively deeper and more structured review, reflecting the increasing size and complexity of the investment.

Seed Stage

At the seed stage, due diligence is typically lighter and more informal. Investors focus primarily on the founding team’s background, vision and ability to execute. Key areas of review include the product or technology concept, market opportunity and early traction. Legal diligence is limited, often centring on basic corporate formation documents, capitalisation table and intellectual property ownership. Investors may also assess the competitive landscape and potential regulatory hurdles, but the process is generally expedited to facilitate quick decision-making.

Series A Financings

For Series A financings, due diligence becomes more comprehensive. Investors scrutinise the company’s business model, financials and customer acquisition strategy. Key areas of focus include validation of product-market fit, revenue streams and scalability. Legal diligence expands to include review of material contracts, employment agreements, intellectual property assignments and any pending litigation. Investors also examine the company’s compliance with relevant regulations and data privacy policies, as well as the robustness of its technology infrastructure. The capitalisation table and prior financing rounds are carefully reviewed to ensure clarity and avoid future disputes.

Growth Stage

At the growth stage (Series B and beyond), due diligence is rigorous and often mirrors the processes seen in private equity transactions. Investors conduct in-depth financial analysis, including revenue growth, margins, unit economics and projections. Legal diligence is exhaustive, covering all material agreements, intellectual property portfolios, regulatory compliance and risk assessments. Operational due diligence includes evaluating management team depth, organisational structure and operational scalability. Investors may also engage third-party experts to assess technology, market positioning and competitive threats. Environmental, social and governance (ESG) factors are increasingly considered, especially for larger funds and later-stage investments.

Key Areas of Focus

Across all stages, the key areas of focus for VC investors include:

• team and leadership – track record, experience, and cohesion;
• product and technology – differentiation, intellectual property and scalability;
• market opportunity – size, growth potential and competitive dynamics;
• financials – revenue, burn rate, unit economics and projections;
• legal and compliance – corporate structure, contracts, IP ownership and regulatory risks; and
• operational risks – scalability, supply chain and organisational structure.

Due diligence by VC fund investors in the United States is tailored to the stage of financing, with increasing depth and rigour as companies mature. The process is designed to uncover risks, validate growth potential and ensure that the investment is sound, with a strong emphasis on team, product, market, financials and legal compliance at every stage.

Timeline

The timeline for a new financing round in a growth company with new anchor investors can vary considerably but generally ranges from four to 12 weeks, depending on the complexity of the transaction, the number of parties involved and the diligence required. The process typically begins with initial negotiations and term sheet discussions, followed by due diligence, definitive documentation and closing. When new anchor investors are involved, the timeline may be extended to accommodate their due diligence and the negotiation of key terms.

The initial stage (ie, the term sheet negotiation) can take anywhere from one to three weeks, as parties align on valuation, investment structure and major deal terms. Once the term sheet is signed, due diligence and drafting of definitive agreements commence. This phase may last three to eight weeks, as new anchor investors conduct thorough reviews of the company’s financials, legal documents and operations. The involvement of new investors often introduces additional layers of diligence and negotiation, particularly around governance rights, board representation and protective provisions.

Relationship Between Parties in Financing Round

The relationship between various parties in a financing round is shaped by both legal and practical considerations. Existing investors may seek to protect their interests through pre-emptive rights, anti-dilution provisions and consent requirements for major corporate actions. New investors, especially anchor investors, typically negotiate for significant influence, including board seats, veto rights and the like.

Counsel arrangements can vary. Separate counsel is common, with each investor group and the company retaining their own legal advisers to ensure independent representation and protect their interests. Most often, a “lead investor” and its counsel will negotiate the documents, with input from other investors and their respective counsel coming only after the documents are largely in final form, with edits limited to critical changes required by the non-lead investor(s).

Majority requirements versus consent from all existing investors is a critical dynamic. Most financing rounds are governed by majority consent provisions, allowing holders of a majority of preferred shares to approve key actions, such as amendments to the charter or issuance of new securities. This majority could mean multiple things. It could mean a majority of all preferred stockholders voting together as a single class, on an as-converted-to-common-stock basis. It could mean a majority of each preferred stock series. The negotiation of these consent thresholds is often a focal point in the transaction, as parties seek to balance efficiency with protection of minority interests.

In the United States, early-stage financings frequently involve the issuance of equity instruments other than common stock. The most common alternatives are preferred stock, convertible notes and Simple Agreements for Future Equity (SAFEs). Preferred stock is the dominant instrument in venture capital financings, offering investors rights, protections and privileges beyond those of common stockholders. These typically include:

• liquidation preferences;
• anti-dilution protections;
• dividend rights; and
• board representation (among others).

Convertible notes and SAFEs are also widely used as they allow investors to provide capital that converts into equity at a later date, often at a discount or with a valuation cap, once a priced equity round occurs. SAFEs have become increasingly ubiquitous in the early-stage market.

Secondary components (ie, where existing shareholders sell their shares to new investors alongside the company’s primary issuance) are less common in early-stage financings but do occur, particularly in larger or later-stage early rounds. Such secondary transactions may allow founders, employees or early investors to achieve some liquidity. However, the primary focus in early-stage deals remains on new money being invested directly into the company.

Market-standard rights for preferred stock typically include some or all of the following:

• liquidation preference (often 1x non-participating);
• anti-dilution adjustment (usually weighted average);
• pro rata/participation rights to invest in future rounds;
• information rights; and
• sometimes, veto rights over major corporate actions.

Convertible notes and SAFEs generally do not carry governance rights or dividends prior to conversion, but may include provisions for interest (in the case of notes), discounts or valuation caps. Overall, the choice of instrument and the rights attached depend on the company’s stage, amount being raised, investor preferences and market conditions.

Assuming preferred stock financing, several key documents are typically required to consummate the transaction.

Typical Key Documents

The primary agreement is the Stock Purchase Agreement (SPA), which outlines the terms of the preferred stock purchase, including:

• the number of shares;
• purchase price;
• representations and warranties; and
• closing conditions.

An Investors’ Rights Agreement is also standard; this document grants investors important rights, such as information rights, registration rights (to facilitate IPOs and the sale of investors’ shares to the public), and rights of first refusal on future share issuances.

A Right of First Refusal and Co-Sale Agreement is commonly executed, giving the company and major investors the right to purchase shares offered for sale by other shareholders before they are sold to third parties, and allowing investors to participate in sales by founders or other key holders.

A Voting Agreement is also typical, specifying how board seats are allocated and sometimes requiring investors and founders to vote their shares in a certain way regarding board composition or other key matters.

The company will usually amend and restate its Certificate of Incorporation to create and define the rights, preferences and privileges of the new series of preferred stock, including:

• liquidation preferences;
• anti-dilution protections;
• dividend rights; and
• conversion rights.

Ancillary Documents

Other ancillary documents may include management rights letters, various closing certificates, indemnification agreements and possibly a legal opinion. Legal opinions are increasingly less common as a customary closing deliverable.

Use of Templates

Market practice in the US heavily relies on the National Venture Capital Association (NVCA) model documents for preferred stock financings. These templates, which are regularly maintained and updated by a committee of venture capital industry members and professional advisers, are widely accepted as the starting point for negotiation and help standardise terms and streamline the process. The NVCA forms include all of the key agreements described above, and their use is considered market standard in venture-backed preferred stock financings.

In the United States, VC investors typically negotiate several key protections for downside scenarios, such as a company winding up or being sold for less than its expected value.

Liquidation Preference

The most significant of these is the liquidation preference, which entitles preferred stockholders to receive their investment back (often with a specified return) before any proceeds are distributed to common shareholders (including founders and employees). The standard is a 1x non-participating liquidation preference but, in tougher market conditions, investors may push for liquidation multiples (2x or 3x, for example) and/or a “participating liquidation preference”, allowing them to receive their preference amount and then share in the remaining proceeds ratably with common shareholders.

Anti-Dilution

Anti-dilution provisions are also common and are designed to protect investors from value erosion if the company issues new shares at a lower price (ie, a “down round”). The most prevalent form is “weighted-average anti-dilution”, which adjusts the conversion price of preferred stock to lessen dilution. The more punitive “full ratchet anti-dilution” is less common but may be negotiated in a weaker fundraising environment.

Pre-Emptive Rights

Pre-emptive rights (also called pro rata rights) are standard in US venture financings. These provisions grant all or some existing investors the right to participate in future equity offerings to maintain their ownership percentage. The rights are usually structured as a contractual obligation for the company to offer new shares to existing investors before offering them to outside parties.

In the United States, venture capital investors typically exert significant influence over management and the affairs of a growth company, primarily through board representation and protective provisions (eg, veto rights). It is market standard for lead investors in a preferred stock financing to secure one or more seats on the company’s board of directors, giving them direct oversight and input into strategic decisions. In addition, investors often negotiate for observer rights, allowing them to attend board meetings, even if they do not have a formal board seat, to participate in board discussions in a non-voting capacity.

The protective provisions are veto rights that require investor approval or consent to specific corporate actions. These protective provisions usually include major decisions such as:

• issuing new shares;
• amending the company’s governing documents in a manner adverse to the investors’ interests;
• approving mergers or acquisitions;
• incurring significant debt;
• declaring dividends; or
• changing the business model.

The scope and detail of these veto rights are negotiated and documented in the transaction documents.

Overall, the market standard is for investors to have strong governance rights through board representation and protective provisions, with more active operational involvement occurring in specific circumstances, such as when the investor holds a controlling stake or the company faces challenges. The balance between oversight and day-to-day involvement is typically calibrated to protect the investor’s interests while allowing management to operate the business.

In a typical US venture capital financing round, both the company and, to a lesser extent, the investors, provide certain representations and warranties, covenants and undertakings in the transaction documents.

The company customarily makes a comprehensive set of representations and warranties in the Stock Purchase Agreement. These cover matters such as:

• corporate organisation and authority;
• capitalisation;
• ownership of intellectual property;
• compliance with laws;
• absence of litigation;
• validity of the shares being issued;
• material contracts;
• financial statements; and
• tax matters.

It is not customary for founders or existing stockholders to make personal representations or warranties with respect to company matters. Investors generally make more limited representations, usually regarding their authority to invest, their status as accredited investors, and their investment intent (eg, for investment purposes and not for resale).

The company typically agrees to both affirmative and negative covenants. Affirmative covenants may include obligations to provide financial statements and other information, maintain insurance or comply with laws. Negative covenants (often set out as “protective provisions”) restrict the company from taking certain actions without investor consent. Investors’ covenants are usually limited and may include obligations to maintain confidentiality or to vote their shares in accordance with certain agreements (eg, voting agreements).

Recourse for breaches of representations, warranties or covenants in venture financings is typically limited. Unlike in M&A transactions, post-closing indemnification is rare. Instead, investors’ primary remedies are the ability to:

• withhold future funding (in staged financings);
• exercise veto rights;
• enforce contractual rights; or
• seek equitable remedies such as injunctions.

In cases of fraud or wilful misconduct, investors may pursue litigation for damages, but such claims are less common. The focus is generally on ongoing governance and control rights rather than monetary recovery for breaches.

Overall, the representations, warranties and covenants in venture financings are designed to provide investors with transparency, governance rights and a degree of protection, while recourse is more about ongoing influence and less about after-the-fact compensation.

In the United States, several government and quasi-government programmes incentivise equity financings for growth companies. One of the most prominent is the Small Business Investment Company (SBIC) programme, administered by the US Small Business Administration (SBA). Under the SBIC programme, private investment funds are licensed and regulated by the SBA and gain access to low-cost, government-backed leverage, which they can use to increase the capital available for investment in qualifying small and growth-stage businesses. SBICs must adhere to certain investment criteria and reporting requirements but the programme is flexible regarding industry focus and investment strategy.

Other notable programmes include state and local venture capital initiatives, which may offer matching funds, tax credits or co-investment opportunities to encourage private investment in targeted sectors or geographic areas. For example, some states provide tax incentives to investors who fund early-stage companies, or they may operate state-sponsored venture funds that invest directly alongside private capital. Additionally, investments in designated economically distressed communities may qualify for certain US federal income tax credits if structured properly, further incentivising equity investment in growth companies located in these areas.

Key characteristics of these programmes typically include:

• eligibility requirements for both investors and portfolio companies;
• oversight or partnership with government agencies; and
• a focus on stimulating economic development, job creation and innovation.

The programmes are designed to catalyse private investment by reducing risk, enhancing returns or providing additional capital to the venture ecosystem.

As a general matter, many portfolio companies are structured as “C” corporations for US federal income tax purposes. A “C” corporation generally is subject to US federal corporate income tax on its earnings, and its shareholders are taxed on distributions from the corporation that are made out of the corporation’s earnings and profits.

There are special tax provisions that can apply to investments in qualifying small businesses, making them particularly relevant to many start-ups and growth companies. The rules for qualified small business stock (QSBS) provide for the exclusion of up to 100% of capital gains from the sale of such stock. There are several technical requirements that must be satisfied, including:

• the company must be organised as a “C” corporation under the applicable US tax rules;
• the stock must be acquired at its initial issuance;
• the company’s assets must have a fair market value below USD75 million (indexed to inflation beginning in 2027) at the time of the stock issuance;
• the shares must be held for a specified holding period; and
• the company must engage in a business that is not excluded from the rules (eg, many professional services and banking/finance businesses).

For investments made after 4 July 2025, the amount excluded from income under the QSBS rules is the greater of (i) USD15 million (indexed to inflation beginning in 2027) and (ii) ten times the investor’s tax basis in the QSBS (generally, cost basis for a cash investor). The QSBS exclusion generally is available only to individuals, subject to the discussion below. The application of these rules is complex and subject to various nuances that should be discussed with a professional experienced in this area, but, in general, these rules are designed to incentivise investments in early-stage companies. Particular care should be taken when considering the transfer of QSBS after original issuance and in respect of any reorganisation of the portfolio company. Not all state income tax laws conform to US federal law, so the availability of the QSBS exclusion on a state income tax level may depend on the state in which the investor is a resident.

For VC funds themselves, which are typically structured as pass-through entities for US federal income tax purposes, items of income, gains, losses, deductions and credits generally pass through to the partners, who report them on their individual tax returns. This raises many structuring considerations for different types of investors that should be carefully examined. An individual investor in a VC fund may be eligible for the QSBS exclusion in respect of its share of gain derived from the disposition of QSBS, provided that certain requirements are met.

The QSBS rules and the rules applicable to VC funds are frequently included in legislative reform proposals.

In the United States, the government has implemented several measures to increase equity and start-up financing activity. One of the most significant is the Small Business Investment Company (SBIC) programme, administered by the Small Business Administration (SBA). The SBIC programme provides government-backed leverage to private investment funds, enabling them to invest more capital in qualifying small businesses and start-ups. This programme has been instrumental in channelling billions of dollars into early-stage and growth companies.

Additionally, various state and local governments have launched their own venture capital initiatives, including matching funds, tax credits and direct investment programmes. For example, some states offer angel investor tax credits to incentivise investments in local start-ups, while others operate state-sponsored venture funds that co-invest alongside private capital to support innovation and job creation.

Federal government support for certain equity financing may also be available through certain federal income tax credit incentives for investments in designated economically distressed areas. These programmes are designed to attract private capital to underserved regions and stimulate entrepreneurial activity.

Furthermore, recent legislative efforts, such as the expansion of the QSBS exclusion and the America COMPETES Act, reflect ongoing government commitment to fostering a robust start-up ecosystem. These initiatives collectively aim to reduce investment risk, enhance returns, and provide additional resources to entrepreneurs and investors, thereby increasing overall equity and start-up financing activity in the US.

Founders’ and key employees’ long-term commitment to a venture is typically secured through a combination of equity incentives and other contractual arrangements. For equity incentives, the most common mechanism is the use of vesting schedules/repurchase rights, where the right to retain ownership of the company’s equity is earned over time, typically subject to continued employment or service. In venture-backed companies, investors often require that a significant portion of founders’ equity be subject to vesting/repurchase rights. A common vesting schedule is four years with a one-year “cliff”, meaning no equity vests until the one-year anniversary of the grant date, after which vesting occurs monthly. If a founder or key employee departs early, unvested equity typically reverts to the company or is otherwise allocated, which can then be used to attract new talent.

In addition to equity vesting, founders and key employees may be required to enter into contractual arrangements with the company that include, depending on the applicable jurisdiction, non-compete, non-solicitation and confidentiality clauses, thereby further aligning the interests of founders and key personnel with the long-term success of the company, its investors and other stakeholders.

Restricted stock and stock options are the primary instruments used to incentivise founders and employees in start-ups and venture-backed companies.

Restricted stock involves the actual issuance of shares to the recipient, but these shares are subject to “reverse vesting”. This means that, while the founder or employee technically owns the shares from the outset, the company retains the right to repurchase any unvested shares (or the shares may be automatically forfeited) if the individual leaves before completing the vesting period. A common vesting schedule is four years with a one-year cliff, after which shares vest monthly. Founders who receive restricted stock often file an 83(b) election with the IRS within 30 days of the grant, allowing them to be taxed on the value of the shares at the time of grant rather than as the shares vest, which can minimise tax liability if the company’s value increases.

Stock options, on the other hand, grant the right to purchase a set number of shares at a fixed exercise price, usually the fair market value at the time of grant. Stock options also commonly vest over a four-year period with a one-year cliff, and then monthly thereafter. Most often, employees are only permitted to exercise (ie, purchase the underlying shares of) vested options, and if they leave the company, they usually have a limited period (often 90 days) to exercise any vested options; unvested options are forfeited upon departure. Stock options do not confer ownership until exercised, and their tax treatment depends on whether they are incentive stock options (ISOs) or non-qualified stock options (NSOs).

Both restricted stock and stock options may include provisions for accelerated vesting upon events such as a change of control or a termination of employment by the company without “cause” within a specified period (eg, one year) following a change in control. These instruments are designed to incentivise long-term commitment and align the interests of founders and employees with the company’s growth and success.

Tax considerations play a significant role in determining the structure of an incentive pool for US start-ups and venture-backed companies. One of the primary considerations is the timing of taxable events. For restricted stock, the recipient must consider whether to file an 83(b) election (which must be filed within 30 days of the grant). By filing this election, the recipient is taxed at ordinary income rates on the value of the shares at the time of grant (over any purchase price paid for the shares), rather than as the shares vest, which can be advantageous if the company’s value is nominal and expected to increase. If the 83(b) election is not filed, the recipient is taxed as the shares vest, potentially at a higher value, resulting in a higher tax cost.

For stock options, which generally are not taxed at the time of grant or vesting, the tax treatment depends on the type of option. Non-qualified stock options (NSOs) are taxed at ordinary income rates on the excess of the fair market value at exercise over the exercise price, with any subsequent gain on sale of the exercised shares taxed at capital gains rates. Incentive stock options (ISOs) are generally not subject to ordinary income tax at the time of exercise; if the exercised shares are held for at least one year after exercise and two years after grant, any gain (ie, the excess of the sale price over the exercise price paid for the shares) is taxed at long-term capital gains rate, which is typically lower than the ordinary income rate. However, exercising ISOs may trigger alternative minimum tax (AMT) liability (at the time of exercise).

The allocation of the incentive pool also has tax implications for the company and existing shareholders, in particular, the availability and timing of the company’s tax deduction. For example, while a company generally would be entitled to a deduction upon the employee’s exercise of non-qualified options, the company generally would not be entitled to a deduction upon the employee’s exercise of ISOs (and may never receive a deduction for the ISOs if the ISO holding period described above is satisfied). Companies must also consider compliance with Internal Revenue Code Section 409A, which generally requires that stock options be granted with an exercise price that is no less than the fair market value of the shares at the time of grant, and governs the timing of deferred compensation to avoid adverse tax consequences. While penalties for non-compliance with Section 409A mostly fall upon the employee (or other service provider), the company does have certain reporting and withholding requirements with respect to non-compliance, and it is otherwise typically in the company’s interest to help ensure that its employees are not subject to tax penalties.

Another tax provision that should be considered, but for which the risk is often quite manageable for venture companies (given the shareholder approval exception) is Section 280G/4999, which imposes a 20% excise tax on the employee (or other service provider), and denies a deduction to the company, with respect to change in control “parachute payments” that exceed a regulatory threshold.

Ultimately, the structure of the incentive pool is shaped by the desire to minimise the tax burden for recipients, maximise the after-tax value of equity awards and ensure compliance with applicable tax rules, while also balancing the interests of the company and its investors. To achieve these goals, careful planning regarding the types of awards, vesting schedules and grant timing is essential.

The implementation of an investment round and the establishment of an employee incentive programme are closely connected, both procedurally and in terms of dilution. When a company is preparing for a financing round, investors typically require clarity regarding the company’s capitalisation, including any existing or proposed equity incentive plans. It is standard practice for investors to request that an equity incentive plan be created or expanded prior to or at the time of the investment round closing, ensuring an adequate pool of options or other forms of equity awards is available for future employee grants. This approach enables the company to attract and retain key talent after the investment, while also protecting investors from additional dilution post-closing. The size of the equity incentive pool is usually negotiated as part of the investment terms and is included in the pre-money valuation, so the dilution from the pool is shared by existing shareholders and, to a lesser extent, new investors. In summary, the set-up of the employee incentive programme is typically co-ordinated with the investment round, and the resulting dilution is factored into the deal structure to balance the interests of founders, employees and investors.

In US venture capital transactions, exit-related provisions that govern shareholders’ rights in connection with a trade sale, IPO or other liquidity event typically include drag-along rights, which allow a specified majority of shareholders to compel minority shareholders to participate in and approve a sale of the company, ensuring that a small group cannot block an exit supported by the majority.

Tag-along (or co-sale) rights are also common, allowing minority shareholders to participate in a sale of shares by majority holders on the same terms.

In the context of an IPO, registration rights may be included, giving investors the ability to require the company to register their shares for public sale or to include them in a company-initiated registration.

Transfer restrictions are also standard and may include:

• rights of first refusal, which give the company and/or existing investors the opportunity to purchase shares before they are sold to third parties;
• lock-up agreements that restrict sales for a period following an IPO; and
• consent requirements for certain transfers.

“Exit triggers” are typically defined as specific events such as a change of control, an IPO or the sale of a controlling interest, and may also include the failure to achieve an exit by a certain date, which can activate redemption rights or other investor protections. The number of liquidity events a company has previously experienced generally does not affect market practice regarding investors’ exit rights in the US; rather, these rights are negotiated based on the company’s stage, the terms of the current investment round and prevailing market conditions, with the goal of aligning the interests of founders, investors and other stakeholders in any future exit scenario.

An IPO exit for start-ups in the United States is relatively rare compared to M&A exits. While the IPO is often seen as a high-profile exit, only a small percentage of venture-backed companies ultimately go public, largely due to the stringent regulatory requirements, costs and market volatility associated with public offerings. The timeline to IPO is driven by several considerations, including:

• the company’s growth trajectory;
• revenue scale;
• profitability or path to profitability;
• market conditions; and
• the need for additional capital.

Companies typically wait until they have achieved significant scale, predictable financial performance and robust corporate governance before pursuing an IPO, as public market investors expect a high degree of transparency and compliance.

The most common listing venues for growth companies in the US are the Nasdaq Stock Market and the New York Stock Exchange (NYSE). In terms of offering structures, traditional firm-commitment underwritten IPOs remain the most frequently pursued route, where investment banks underwrite and market the shares to institutional and retail investors. However, alternative structures such as direct listings and mergers with special purpose acquisition companies (SPACs) have gained traction in recent years, providing different paths to the public markets. The choice of venue and structure is influenced by factors such as:

• company size;
• investor base
• desired liquidity; and
• market conditions at the time of the offering.

There is indeed a tangible market need for secondary market trading prior to an IPO in the United States, particularly to provide liquidity for early investors, founders and employees who may have significant equity holdings but limited opportunities to realise value before a public exit. As start-ups remain private for longer periods and valuations increase, the demand for structured liquidity solutions, such as secondary sales or company-facilitated tender offers, has grown. These transactions allow shareholders to sell some or all of their shares to new or existing investors before an IPO, helping to address personal liquidity needs, diversify holdings or satisfy tax obligations.

However, secondary market trading in private company shares faces several key challenges. First, transfer restrictions in the company’s charter, investor agreements and equity plans often limit or require company consent for share transfers to maintain control over the cap table and protect sensitive information. Second, securities law considerations, such as compliance with exemptions from registration under the Securities Act of 1933, must be addressed to avoid triggering public offering requirements. Third, valuation and information asymmetry can complicate negotiations, as private company shares are illiquid and pricing is less transparent than in public markets.

To implement a structured liquidity programme, companies typically need to:

• amend or clarify transfer restrictions;
• establish clear procedures for approving transfers; and
• ensure compliance with applicable securities laws (such as using Rule 144 or Section 4(a)(2) exemptions).

Company-facilitated tender offers have become an increasingly common solution, allowing the company to organise and control the process by offering to repurchase shares from employees or investors at a set price, often with the participation of outside investors. These programmes provide a fair and orderly mechanism for liquidity, help manage the shareholder base, and ensure compliance with legal and contractual requirements. In summary, while there is a clear market need for pre-IPO liquidity, careful structuring and legal planning are essential to address the associated challenges and risks.

In US venture capital transactions, the offering of a company’s equity securities is primarily governed by federal and state securities laws, as well as the company’s own charter documents and relevant contractual agreements. At the federal level, the Securities Act of 1933 requires that any offer or sale of securities be registered with the Securities and Exchange Commission (SEC) unless an exemption applies. The most commonly used exemption in venture capital deals is Regulation D (particularly Rule 506(b) or 506(c)), which allows private placements to accredited investors without SEC registration, provided certain disclosure, filing and solicitation requirements are met. For offerings involving a larger number of participants, such as employees or holders of incentive awards, Rule 701 under the Securities Act provides a safe harbour exemption for the issuance of securities pursuant to compensatory benefit plans, subject to limits on the aggregate offering amount and enhanced disclosure obligations if certain thresholds are exceeded.

State “blue sky” laws may also apply, but most are pre-empted for offerings under Rule 506. That said, note that notice filings and fees may still be required at the state level. The company’s organisational documents (such as the certificate of incorporation and by-laws) and the terms of existing investor agreements (like rights of first refusal, co-sale rights, and approval requirements) must also be observed to ensure that new issuances do not violate contractual obligations or trigger anti-dilution protections. In larger transactions, or when numerous employees or incentive award holders are involved, careful attention must be paid to securities law compliance, disclosure requirements and cap table administration to avoid inadvertent violations or adverse tax consequences. Additionally, the company should ensure that all necessary board and shareholder approvals are obtained, and that the terms of the offering are clearly documented in stock purchase agreements or option grant documentation.

In the United States, while there are generally few restrictions on foreign venture capital (VC) investment in growth or portfolio companies, certain regulatory regimes can prohibit or limit such investments in specific circumstances. The most significant restriction arises from the review of foreign direct investment (FDI) by the Committee on Foreign Investment in the United States (CFIUS).

CFIUS has the authority to review and potentially block or unwind investments by foreign persons in US companies if the transaction could result in foreign control or access to sensitive technologies, critical infrastructure or personal data, and is deemed to pose a national security risk. Sectors such as defence, telecommunications, energy and technology (including artificial intelligence, semiconductors and cybersecurity) are particularly sensitive. In some cases, mandatory CFIUS filings are required, especially for investments involving critical technologies or certain government contracts.

Over the past 12 months, the significance of CFIUS review and related FDI restrictions has increased, reflecting heightened scrutiny of foreign investment. The US government has continued to expand the scope of transactions subject to review and has emphasised enforcement, resulting in more companies and investors proactively assessing CFIUS risk and, in some cases, structuring transactions to avoid triggering review. As a result, while the US remains broadly open to foreign VC investment, regulatory diligence regarding FDI restrictions has become a more prominent and necessary part of the investment process.