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The Proliferation of Standardized Seed Financing Documents
As of today’s announcement that Ted Wang at Fenwick & West has collaborated with a group of bay area early stage VC’s and angel investors to create the Series Seed Documents we now have – at my count – four different standardized seed financing documents floating around the industry.
- TechStars Model Seed Funding Documents (by Cooley)
- Y Combinator Series AA Equity Financing Documents (by WSGR)
- Founders Institute Plain Preferred Term Sheet (by WSGR)
- Series Seed Financing Documents (by Fenwick & West)
Many smart and capable people have either worked on these various docs on signed on as supporters. However, until there is one standardized set of documents that everyone – especially the various law firms agree on – I don’t expect there to really be a standardized set of seed financing documents. I wrote about this in my post The Challenge of The Ideal First Round Term Sheet.
Rather than whine about it, after reading the PEHub article Marc Andreessen on “Series Seed Documents,” and Why VCs Should Start Using Them I’ve decided to try to get a handful of lawyers in a room and try to come out with one set of documents. This might be a futile effort, which will prove the point that it’s impossible to create one standard set of documents. But – I’m an optimist, so I’m going to plan for a good outcome.
I’ll proactively reaching out to the appropriate folks at Cooley, WSGR, and Fenwick & West to organize a one day session, with laptops, somewhere in the bay area. I’ll include a handful of early stage investors (both VCs and angels) in this effort. My goal will be to finish the day with a truly standardized set of seed documents that all of the firms agree to use. Then we’ll open source these and evangelize them across the startup world, at least in the US.
If you are an attorney at a major national or regional law firm that works with startup companies, please email me if you are interested in participating. If you are a VC or angel investor that supports this effort – same drill (email me). Let’s end this madness (which I’ve been dealing with for 16 years and an angel and VC investor) once and for all – the entrepreneurs who we work with deserve better from us.
Let me just say after spending an insane amount of time, effort and money on our financing…. *high five*
Brad, great idea, but don't you think you might need to run it as an annual conference? There are things that change every year in the code and in case law that might require changes. If you don't get them together once a year they will each make their own "fork" and within a few years it will be in the same place.
Given that the fundamental dynamics in the docs haven’t changed in the 16 years I’ve been doing this, I’ll accept a once a year meeting with the same group to (a) refresh the docs and (b) drink a lot of beer afterwards.
+1 My thoughts exactly. As market conditions change and as VC (and their lawyers) encounter new situations, they will continue to add terms into subsequent doc revisions.
This is a good thing. A proliferation of standards is usually followed by the adoption of a single acceptable one – if some party is willing to drive and own it… Would be beneficial to find a neutral "clearinghouse" to host the docs, a la SourceForge.
In the interest of full disclosuret: I'm a former big firm lawyer who now runs a small firm. I've represented both investors and entrepreneurs in financing transactions for over six years.
I agree with the concept of creating standardized documents, but I think it's important to set expectations. Narrowing the range of issues for lawyers to negotiate reduces unnecessary legal time (and therefore reduces legal costs), but even where the terms are well known, the range of options for each term is generally accepted, and "standardized" documents exist, there is no such thing as a one-size-fits-all agreement. Every entrepreneur and every investor has a different risk profile, and these differences will always result in the need to personalize an agreement. So while much time and money can be saved by getting consensus on many terms in financing agreements, it is a bad idea for anyone (least of all inexperienced entrepreneurs) to try to say money by taking a "standardized" agreement and simply filling in the blanks.
Two things entrepreneurs can do to reduce their legal fees in a financing without cutting corners:
(1) Find a lawyer who has experience negotiating financing transactions. Financing terms are not incredibly complicated so you don't need someone who does hundreds of deals every year (in fact, it's probably not cost-effective), but you also shouldn't go with your uncle the divorce lawyer who will waste time trying to negotiate common terms. If you need recommendations, ask investors or other entrepreneurs who have gone through a financing.
(2) Ask your lawyer to go through a typical term sheet with you (many will be willing to do this without billing you) before you approach potential investors so you become familiar with the terms. It takes no more than an hour to do a detailed walk through of a typical Series A term sheet (I recommend the annotated model term sheet available at http://www.nvca.org), and much less time for a seed financing term sheet. The knowledge you'll gain will allow you to negotiate more efficiently and effectively, leaving less for the lawyers to negotiate later.
what do you get with a room full of lawyers and one vc…
seriously, awesome! i hope they take you up on the offer…
great one..this is really great..
I disagree with you that this is necessary in a seed deal (reasonable in a $1MM+ Series A). Any lawyering at all wastes money at the seed stage. But in any case, entrepreneurs can benefit from the standardized documents because they can see a redline of what's being proposed against the standard. In other words, even if an investor doesn't want to use the standard documents, they ought to start from there.
The prospect of a Bay-area summit to settle on a single set of financing docs reminds me of last week's bipartisan "healthcare summit" in Washington.
awesome stuff, Brad.
Finally! This would make it much easier and more transparent for entrepreneurs and seed money providers. As by-product it should drive transaction costs down quite a bit.
Orrick has a set of these too, Brad: https://tsc.orrick.com/ Might as well get in touch with them too.
Brad – I suppose we are guilty of adding to the proliferation since we've done variations of "simple series A" or "simple seed" and similar programs for a number of our early stage and seed investor clients over the years. I think your post and Ted's recent effort to move towards a truly open source solution makes a lot of sense. I also think getting buy in from as many parts of the ecosystem as possible is a good approach and we'd be happy to participate. Obviously we compete like hell with Fenwick, WSGR and the others in our space, but I also breathe a sigh of relief when one of them is on the other side of a deal because I know we're speaking the same language, can cut out a ton of the bullshit and limit the wrangling to real business issues. Anything that furthers that end I think is a win for everyone.
Ivan Gaviria, Gunderson Dettmer
Brad – I think the underlying issue here is law firm rates. They are too high for startups, and there has been much focus of late in the legal community on the death of the billable hour and a need for alternatives, especially in the startup community. I think an easier way to deal with this issue in the context of financings (whether seed or otherwise) is to cap all fees in the deal. Cap company counsel fees the same way investor counsel's fees are capped, and then expectations are set. Particularly at the seed stage, there should not be unforeseen issues that have the potential to drive up fees, so law firms should easily be able to get behind this proposal. The general rule of thumb is company counsel, assuming it drafts, is 1.5x investor counsel's fees. If the investor and startup community adopted this as standard practice, then which set of docs to use becomes somewhat irrelevant.
This is a good approach with the one issue that the investor council lets the drift up over time (I’ve seen this over and over again). But – good approach.
Yeah – after a day’s worth of emails I’m starting to feel the same way.
Certainly true that the rates of large firms are way too high for startups. There are small firms that offer hourly rates more in-line with a startup's budget while still providing comparable expertise to a large firm. Capping or fixing fees is also much easier for small firms, which don't have high overhead costs to cover.
I agree there is a benefit to standardized docs, but it is important understand that even with standardized documents there will be some negotiation. I disagree that lawyering is a waste of money at the seed stage. Experienced entrepreneurs may understand terms well enough to get away without much legal advice, but first time entrepreneurs can get fleeced by early stage investors without the benefit of a lawyer (or another advisor) who has experience with financing transactions.
The Proliferation of Standardized Seed Financing Documents…
Many smart and capable people have either worked on these various docs on signed on as supporters. However, until there is one standardized set of documents that everyone – especially the various law firms agree on – I don’t expect there to really be a…
Its always nice to see someone taking steps to fix something they believe is broken.
Good luck.
SKP
I think the fact of the matter is companies and investors don't want to buy time from lawyers – they want to buy expertise from lawyers. If big firms came to terms with that, they could charge a slightly higher (though still reasonable) flat fee on the company side for an early-stage deal (seed, Series A, etc.) than could a small firm that might not have the level of expertise under its roof (and we can debate how much expertise is actually needed for these deals – the answer is not a lot, which is why junior associates are the ones primarily doing them, albeit inefficiently, at bigger firms) and perhaps still attract the lion's share of the business, and then have the relationship with the company from day one (which is better and cheaper than swapping in a larger firm at a later date as the company scales – always a costly proposition).
Fundamentally, investors do not want to pay big firms to train their associates, and that is what happens on financings. Big firms use financings as a training tool for junior and mid-level associates, who bill out at $200-$300/hr. The net result is mistakes and inefficiency, which then drives up fees. A capped fee on the company side eliminates this and better aligns interests. Until then, smaller firms will be able to pick-off early-stage clients. But, there will never be enough small firms to service all of the VC ecosystem, and the big firms know this, and so they aren't incented to do much about rates. Only until the investor community says enough is enough will rates at big firms get modified, because the relationships with the investment community are key to any big firm's success.
[...] * Brad Feld on the proliferation of standardized seed financing docs [...]
Andrew, completely agree with you that fees are a big problem for startups. I've seen many early stage term sheets with investor legal fees capped anywhere between $15k-$35k. With your multiplier of 1.5x that would work out to $37.5k-$52.5k for an seed/early stage deal. These numbers just seem really high to me given that most seed/early stage investment docs are extremely boilerplate.
If you can pull this off we will send you to Washington. They need some help there too.
Reality check fromthose of us outside the Valley:
Every angel has a personal investment thesis, and every region has different angels. Some are really, really different, but they write big checks and occasionally pay for donuts.
Standard documents are good benchmarks for discussing angel idosyncracies, but they don't do much more for my clients. The funding options, ROI expectations may be different enought o make assumptions built into the standards irrelevant.
I agree with Andrew – if this is largely about legal costs, then set a cap on fees. Make it a significant cap. A basic seed deal should not cost more than $10k (and should even cost less) and firms who will not price accordingly do not wish to be in the seed business.
Price aside, if your lawyer is not doing more than 1 seed deal a month you've got the wrong lawyer, anyhow.
Lawyers & V.C. Why no entrepreneurs included in your think tank day?
Seems a little one-sided on Preferred.
I definitely would include entrepreneurs in this.
These series a docs are great… But the entrepreneur is typically the most cash constrained at the very beginning of its life; the entity formation stage. Can we do something with open source docs to help with the entity formation?
In my experience, most startup lawyers will actually do entity formation for free since it’s so trivial at this point. And – for the entrepreneur – please don’t forget to file your 83b!
I am both an entrepreneur (having started up and run 2 companies) and an attorney (having worked at both large silicon valley law firm, and small east bay law firm servicing startup companies). Happy to join in, if you want another perspective (smorgan@equilytics.com).
I'd appreciate it if these things would be structured as a web form where you could enter the terms you wanted and it would spit out a contract which has those terms. Terms like voting rights, liquidity preferences, and valuation need to be put front and center and paramaterized independently.
@bramchoen – actually, at WSGR, we use a more robust version of the automated document creation tool (that you might have seen on our web site that creates term sheets) that automatically creates Series A documents after filling in an online questionnaire. http://www.wsgr.com/wsgr/Display.aspx?SectionName...
Look for some interesting things to come from Brightleaf on this theme soon. <a href="http://www.brightleaf.comwww.brightleaf.com<br />
[...] know I owe everyone a follow up to my post from last week titled The Proliferation of Standardized Seed Financing Documents. To the many of you out there that emailed me in response, thanks for all of the thought, [...]
I completely agree with you. I was motivated by the same thoughts, which is why I created a website called http://www.TheLawyerMarket.com. The Lawyer Market basically is like Priceline, but for finding lawyers instead of travel deals. The Lawyer Market has already helped several young entrepreneurs with their legal needs.
I agree with Ben. In the interest of disclosure, I am also a lawyer, and this does not constitute legal advice
Having a completely standardized term sheet defeats the purpose of having a term sheet. The reason term sheets are necessary in the first place is because circumstances vary from deal to deal, and both parties want a legal instrument that is tailored to the circumstances. If you have a completely standardized instrument, you're not doing yourself a favor.
[...] article by Brad Feld on attempts to draw up standardized seed round funding documents. [...]
[...] partner Brad recently wrote a blog post commenting on the proliferation of standardized seed financing documents. The post was motivated by the highly-publicized release of the fourth instantiation of such a [...]
I would rather be pumping capital into emerging companies instead of paying my lawyers but I do have to admit that my lawyers are quite worth the money so anyone in the business of starting and running companies for money better get used to it. Sure a term sheet looks relatively straight forward but do you see 10 a week as an entrepreneur? I don't think so. Bite the bullet. It will be worth it!
Hi Brad – I like the idea of attempting (even a partial) consensus with (one or more) all-day sessions. I support your "optimism" — and have posted in support of your position on the Walker Corporate Law Group blog: http://bit.ly/dlxpQu. Keep up the good work!!
Thanks. I’ve figured out what I want to do (or not do) – expect a post soon.
[...] path in the context of a larger set of activities. A few weeks ago, I wrote a post about The Proliferation of Standardized Seed Financing Documents. It generated several hundred email responses and a handful of phone calls. A week or so [...]