Recently, several entrepreneurs and investors have asserted to me that they don’t think the terms on a convertible debt deal matter much. I was perplexed by the statement and asked each of them to tell me more. In every case, the person hadn’t really thought through the issues. Rather, they were just spouting what they believed was conventional wisdom about terms for seed deals.

In one of the entrepreneur cases, I explained how it was likely that they were going to be on the wrong side of the valuation discussion in the next financing based on one of the terms. In one of the investor cases, I explained the difference between a 2x return and a 15x return – using a real example – based on the way the note was written. And in a third case a separate potential angel investor in the deal brought up a specific term that was important to him that addressed a real concern.

We rarely do convertible debt at Foundry Group – we much prefer to do equity rounds, even at the seed stage. However, many of the seed rounds done in TechStars are done using convertible debt as are many financings of less than $1m. So, if you are an entrepreneur or seed investor, I think it’s important to understand how convertible debt works and what the impact of various terms are.

In Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, my partner Jason Mendelson and I touched on convertible debt but didn’t go into much detail on the specific terms. A number of people have asked us about them since the book came out so we’ve started a Convertible Debt series on AsktheVC. The first three posts are up:

• Convertible Debt Series
• Convertible Debt – The Discount
• Convertible Debt – Valuation Caps

There are nine posts in the series – coming out every Tuesday and Thursday until we are done. If you notice anything confusing, or incorrect, please comment and/or ask questions so we can clarify and/or fix.

If you can’t wait for the full series, take a look at the annotated term sheet for a convertible note on the TechStars site (also available on the AsktheVC Resources page.)

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.