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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Failing Fast at Standardized Seed Deal Documents

Comments (79)

While some people hate the phrase “failing fast”, I find it instructive when it’s used to signify that one isn’t going to pursue a particular 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 later, my partner Jason Mendelson wrote a post titled Why There Will Never be a Standard Set of Seed Documents. I’ve concluded that Jason is right so rather than torture myself, I’m failing fast with regard to trying to help create a set of standardized seed documents.

Since I received so many private responses to the original post, I thought I’d summarize them here by type of respondent.

Lawyers: By far the largest numbers of responses were from lawyers offering to help (thanks!)  I didn’t count them up, but I got well over 100 emails from all over the US.  In many cases, the lawyer offered to come to the meeting, share their seed documentation, and work to make sure that seed documents were complete and acceptable to their firm.  The vast majority of lawyers provided solid background on all the seed investment work they had done.  Several weighed in with their views of the potential issues, often sighting the NVCA standard document process which everyone seemed to refer to as some version of “a mess.”  A few made sure to remind me that east coast lawyers needed to be involved or the docs wouldn’t work on the east coast.  A few brave ones told me why I was destined to fail but wished me luck anyway.  Fortunately, due to the magic of Gist, I now have contact information for a whole bunch of lawyers I didn’t know before.

Entrepreneurs: The next largest number of respondents were entrepreneurs.  I think all of them cheered me on, told me how much they hated paying lawyers for their seed documents, and asked if there was some way to reduce everything to a few standard pages, not unlike a mortgage document.  A few told me “don’t include lawyer X in the process – he charged me $70,000 for my seed deal” and a few suggested that lawyers should have to use paper and crayons instead of word processors.  Several asked if I’d be interested in funding their companies.  All demonstrated a sense of humor about the situation.

VCs: The VC comments came in a few different flavors.  A few said “I don’t see the problem – it’s fine having multiple seed documents.”  Another reminded me that “great is the enemy of good” (although the real, and more relevant quote is “The perfect is the enemy of the good”) and the existing forms floating around are “very good – much better than they used to be.”  Another suggested that none of the standard docs worked for him, but he was perfectly happy to sign the forms from Law Firm Z without any modification.  Several asked me whether I was still watching 24 (yes, I will watch it to the bitter end.)  I received private emails from each of my partners containing a slightly different version of “are you out of your fucking mind?”

LPs: I only had one email from an LP.  It was a short one.  “Don’t waste your time on this.”

After pondering all of this, I realized that I was both trying to solve a problem that didn’t really want to be solved while at the same time falling into a common trap of working on something that, while on the surface seems like a good idea, isn’t really my issue to solve, at least not in this way.  As many of you know, the issue is not only the term sheet, but also the underlying documents supporting the deal.  I think this is a nuance that is often missed, as the seed docs need to be robust enough to easily support a next round financing (Series A or Series B) since the seed financing is rarely the last one.  So, while a simple term sheet might be able to be agreed on, I realized that getting the actual docs agreed on would be a miserable, and likely impossible, thing to try to deal with.

Hence my failing fast.  While in theory this might be a great idea, I’ve concluded that I can’t be successful at this.  There are plenty of people – namely all the lawyers that work with startups – that have a much greater incentive than I do to get this right, be efficient for the entrepreneurs they work with, and be cost-effective for the companies they bill.  So, I’m going to leave it to them.

  • John Buehler

    I am a firm believer in "fail faster, quit sooner". I am also a believer in the 80% solution. You seem to have a set of docs that will work for you in 80% of your investments and the incremental work to make them perfect from there is probably greater than the individual tailoring that will be required for all of the rest of the deals you will do in your (hopefully long and prosperous) life.

    - I have traveled many roads in my life and seen the end of very few. Its much more interesting to change directions than to get to the end of the road and have to turn around.

    • http://www.facebook.com/bfeld Brad Feld

      Yup – that's exactly my conclusion.

  • http://www.facebook.com/scodtt Scott Yates

    Between the startup visa movement, fixing the Amazon debacle in Colorado, fixing software patents, and, — oh, yeah — your job, you have plenty to do!

  • http://twitter.com/reecepacheco @reecepacheco

    ha… “great is the enemy of good" from a VC.

    I'd bet they'd argue the other way around in the case of a potential exit/return.

    • http://intensedebate.com/people/bfeld Brad Feld

      Correcting the Voltaire quote now to “The perfect is the enemy of the good”.  This is what I meant, although not what the VC sent me!

  • DaveJ

    An alternative that is probably valuable is some sort of aggregation of different deals so that people can see the range of terms available/offered; even better would be an inline analysis of what the provisions mean, why they are there, and what the pros/cons are. Seems like some sort of wiki-like facility could serve this purpose.

    • http://intensedebate.com/people/bfeld Brad Feld

      Theoretically we could turn our Term Sheet series into a wiki and get people to add on to it.  Oh, if there were only three of me.

      • DaveJ

        Ross…

    • http://intensedebate.com/people/steve_bergs2127 Steve Bergstein

      Sounds like the beginnings of wizard for generating seed deal documents.

  • http://twitter.com/LDEakman @LDEakman

    Glad to see you picking your fights where you can win. That said, hard to ever admit that Jason is right.

  • http://intensedebate.com/people/williamcarleton William Carleton

    Brad, in leaving the field you sure are leaving a wealth of insight for others who might pick this up.

    Nothing terribly original with the following thought, but the Series Seed documents by Ted Wang are very good, and will support "modularization" so that deal docs for subsequent rounds can be built upon them. (Other lawyers disagree though and think subsequent rounds will have to start from scratch with new docs.)

    Your conclusion that lawyers should lead this, having the right incentives, makes sense. Query though whether bigger firms can endorse this. They may have too much invested in their templates, in training their lawyers on them, in managing their risks with them. I could be wrong, but I think the lawyers who can do this will be iconoclasts or extremely high-profile lawyers from the big firms, and entrepreneur- and angel-oriented lawyers at boutiques.

    While lawyers may need to settle on the modules in the docs, success (adoption) depends on you and other VCs, and serial entrepreneurs. Investors and companies will need to give permission to tell the world, if not every precise variant term, then the fact that the seed financing terms and documents were used. Picking a number out of the air here, but I think even something like 15% adoption would be huge and would end up winning the day.

    The goal should be to reduce startup legal fees in seed financings to $10,000?

    • http://www.facebook.com/DonaldFoss Donald E. Foss

      Lawyers have the incentive to standardize their templates internally and train their staff to use them, but I don't think the lawyers have any incentive reduce our costs by 85%–$70k to $10k. Programmers and IT staff may occasionally work themselves out of a job, but lawyers rarely do. As someone mentioned earlier, many lawyers want the docs for each series to start from scratch, making each round more complicated and painfully expensive.

      I agree that it would take a high-profile lawyer with iconoclastic tendencies to make any splash here because they wouldn't be affected by the disincentives–they've already made it and it would increase their standing and ego even further. It could also be a prominent VC firm that standardized their own docs and encouraged others to follow. The lawyers as a collective will never do it themselves.

    • http://intensedebate.com/people/bfeld Brad Feld

      Yup – I think a fee cap of around $10,000 (for both sides) is probably the right dynamic.

  • duncan

    Very good post.. Maybe a better idea would be to post a forum where everyone can post thier documents and people can download and review them..
    allowing everyone to make their own frankenstein.

    g

    • http://www.facebook.com/DonaldFoss Donald E. Foss

      One man's garbage is another's treasure. In this case, I doubt the Frankenstein, for that is what it would end up looking like, would win any beauty contests.

  • http://www.hydeparkangels.com Ira Weiss

    To entreprenuers….

    As a serial angel investor and occasional VC — short of a standard set of legals docs — my recommendation to entreprenuers is to make sure that the term sheet always caps legal expenses for both the investor counsel and company counsel (or at a minimum, a 'fixed fee').

    To find out a reasonable cap amount for your financing, ask other experienced investors and entreprenuers who are familiar with this stage investing, pointing out anything that might be somewhat unusual about the deal. Talk to lawyers as well, however, be prepared for some to point out all the problems with capping fees.

    For a clean seed/series A deal, you can probably get it done with a cap on the investor side of 12.5-20K, but with a slightly higher cap for company counsel. Get counsel who is very familiar with these financings.

    Keep the terms as standard as possible.

    Ira Weiss
    Hyde Park Angels and RK Ventures
    http://www.hydeparkangels.com
    http://www.rkventures.com

  • http://www.walkercorporatelaw.com Susan Morgan

    I understand the reasons for withdrawing from a proposed all-day meeting to create a standardized set of seed documents. But I would argue that this effort at standardization has not yet failed, not has your proposal to hold such a meeting been for naught. For one thing, an increased awareness of these seed documents has been propagated as a result, and a highly useful dialog about them has begun. The fact that we have publicly available seed documents (which have more terms in common with each other than not) is a tremendous step forward in simplifying and reducing the expenses of future seed series financings. As I wrote in a previous post (http://bit.ly/dlxpQu), this alone is an indication that we have already achieved some measure of success. (due to length – this has been broken into two pieces – see next piece following…)

  • http://www.walkercorporatelaw.com Susan Morgan

    (continued from prior piece …) As to further standardization, it may well be that an all-day drafting session is not the best route to achieving that goal. But the dialog that has begun here, could potentially lead to a more organic process that ultimately achieves the same results. Some of the authors of the various seed documents have talked about meeting, to determine if further conformance between their documents can be achieved. In addition, as the various constituent parties consider using one or more (or variations of) these publicly-available documents, and the documents themselves become updated to reflect further commonalities due to such usage, further standardization may well emerge.

    So, rather than “failing fast”, I would say that perhaps you have just taken a different tack. An organized one-day drafting session may not be the right process for reaching standardization, but I think there is value in having publicly-available and periodically updated documents (even with some proliferation), and in maintaining this ongoing dialog among constituent parties, in an attempt to reach some consensus. We may achieve organically, what we are unlikely to achieve organizationally.

    • http://intensedebate.com/people/bfeld Brad Feld

      All good thoughts – thanks for the positive sentiments.  I agree that an organic approach at this point seems like the right run.

  • http://www.pass4sure.eu/Cisco/642-515.html 642-515

    I can't agree with more.

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