Milestone Money: NVCA Standardizes Tranched Financings

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 become, and how much time deal parties waste reinventing the same provisions again and again.

A tranched financing is exactly what it sounds like: instead of writing one big check on day one, an investor agrees to fund a round in a series of installments, or "tranches," with later tranches closing only if the company hits agreed milestones. Life-science companies have lived with this structure forever (clinical milestones practically invite it), but over the last several years, software, tech and even consumer startups have seen more investors insist on milestone deals. Market uncertainty, higher diligence standards and investors' desire for better risk calibration all pushed tranched deals into the mainstream.

The NVCA's inclusion of these mechanics in its model SPA is essentially an acknowledgment that tranched deals are here to stay, and everyone should at least start from the same baseline playbook.

What the NVCA is Trying to Solve

If you've ever negotiated a tranched round from scratch, you know the pain points. What exactly is the milestone? Who decides whether it's been met? What happens if the milestone is almost met, or met late? Does the company have to re-make every representation and warranty at each closing? And what if a dispute arises right when the company needs the money most?

The NVCA update doesn't answer every question for you; nor should it; but it provides a structured framework: sample definitions, closing mechanics, milestone certification processes and even sample remedies. Instead of starting with a blank page, parties can begin with something middle-of-the-road and calibrate it up or down based on the company's risk profile.

And just as importantly, founders and investors now have a sense of what "market" looks like in this context. Even if they depart from it, having a common starting point clears out a lot of friction.

Devil Remains in the Milestones

Of course, dropping in the NVCA language doesn't magically make a milestone workable. The art is almost always in defining what counts as hitting the goal. A milestone like "$2M ARR by Q2 2026" sounds straightforward, but does that mean GAAP revenue? Annualized from a single quarter? Collected cash? Who certifies the number?

Investors often prefer retaining approval rights, perhaps to their reasonable satisfaction, but founders understandably push back; they don't want to meet the goal only to find that the investor disagrees. The NVCA suggests more objective approaches – board certification or third-party validation – which tend to reduce gamesmanship and closing risk.

Then there's the question of timing: Is there any wiggle room for delays caused by outside forces? Should the company get a cure period? Milestones that ignore real-world contingencies often set the company up to fail, and no one actually wants a financing structure that forces an otherwise healthy company into a liquidity trap.

Price, Protections and the Inter-Tranche Period

Another set of conversations revolves around economics. In a simple version, every tranche is priced the same. But in more customized deals, the later tranches might re-price based on performance or reflect a discount or premium tied to achieving (or missing) specific milestones. If the parties go that route, the NVCA provides structure, but the valuation details still have to be carefully negotiated.

And because investors are effectively funding the company in stages, they often look for tighter operational covenants between closings: more frequent reporting, budget-to-actual comparisons, or restrictions on major transactions. Founders, on the other hand, want to avoid a structure that is too intrusive. The NVCA language sets an ordinary baseline but leaves plenty of room to scale covenants appropriately.

Another sticking point is the repetition of reps and warranties at each closing. Re-making the entire suite of reps every time can give investors opportunities to walk away. But requiring only the truly fundamental reps (authorization, cap table, IP ownership) strikes a more balanced approach.

What Happens If the Milestone Isn't Met?

This part of the document tends to be the most emotionally charged. If the company doesn't hit the milestone, does the investor have to walk away entirely? Can the tranche be reduced? Should there be alternative funding options? Do the parties go back to the drawing board?

The NVCA provides sample fallback structures – a partial funding mechanism, extensions or even a renegotiation window. In practice, the most founder-friendly deals include some breathing room: maybe the milestone can be achieved within a 60-day grace period, or maybe the investor can opt to proceed with the tranche at the original price if the company is close enough.

The best structures give both sides optionality without sabotaging the company's ability to operate.

Bottom Line: Helpful Starting Point for Tranched Financings

The October 2025 NVCA update for its model stock purchase agreement is a meaningful step toward normalizing and de-risking tranched financings. But like all model language, it's only a starting point. The real substance – milestone definition, verification, valuation structure, interim covenants and remedies – will always depend on the company's stage and the nature of its business.

For founders, the biggest takeaway is this: a tranched deal isn't necessarily bad, but vague milestones, discretionary investor approval and overly broad closing conditions can turn it into a minefield. The NVCA's framework helps you spot those issues early.

For investors, the update gives you a disciplined, market-based way to protect downside risk without over-engineering the documents.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.