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Kenneth Obel

Reducing legal fees with standard documents for seed-stage deals

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There seems to be a lot of discussion among VC's and lawyers on the coasts about the proper legal vehicle for seed-stage deals (e.g., here, here and here) and ways to streamline the legal documents (and thereby to minimize the legal fees) . As the founder of a legal practice devoted to serving startups at a reasonable cost, I am keenly interested in these subjects.

One really interesting set of documents is called Series Seed, an open-source legal project being curated by a Bay-Area venture capital attorney. His premise is that there are not that many issues to negotiate in a simple equity financing and that the Series Seed documents represent the 95% consensus of what should be in a very basic set of equity financing documents. 

The set of documents assumes that the round uses a C Corporation structure, which works fine for some startups though others may have reasons to prefer a flow-through entity such as a LLC. It would certainly be possible, of course, to create an equivalent set of documents for a LLC. 

I'm digging into the Series Seed documents now. I'll post some thoughts down the road. I would be interested to know what others think as well. It's time for the Midwest to weigh in with some opinions here.

 

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Comments

Karthik Chandramouli

Here's a link to standard Series AA docs from YCombinator & Wilson Sonsini:

http://www.scribd.com/ycdocs

Troy Henikoff

I would love to see the complexity and expense of closing early stage deals be reduced dramatically!!!  The approach of having some set and accepted templates that take care of 90% of the details frees up time and money to have the legal council focus on the 5-10% that really matters...

David Guttman

It is naive to think that a boilerplate set of docs can serve the necessary purposes for a start-up. What IS needed is a good set of starting documents that can be modified by a savvy lawyer that can ask the right questions and modify those docs in a way that meets the needs of the start-up entrepreneur and keep the cost reasonable.

Kenneth Obel

I'll share some feedback soon -- some client work ahead in the queue. But to be clear, my take is that while template/open-source documents are a good idea and a potential work saver, they still need to be used in conjunction with the right quantity of legal counsel. No matter how good the templates, I think startups could get themselves in big trouble by just signing template documents. But the amount of legal counsel needed, depending on the size and complexity of the deal, could be relatively modest.

Seth Kravitz

I would be very interested in the idea of there being an open set of legal documents for seed stage startups to utilize. I'm curious what your feedback will be once you have read them and whether or not they are a safe choice for a brand new startup to use.

Kenneth Obel

Thanks for the comments, Karthik. Fred Wilson has definitely been beating the drum on this subject, and he is absolutely right to. Seed-stage documents and representation just should not cost so much. He cites lawyers at firms charging $15K and up for small rounds. I think if anything, he is underestimating it. I know local founders who are spending between $20K and $30K for small rounds, which strikes me as insane. I am working with some founder clients now on a launch, and charging less than $5K. That's a matter with more organization and founder setup, less outside fundraising. I recently bid on a more ambitious startup, with about $500K of money coming in, for a fee of $9.5K. So it definitely is possible to do these things more economically.

 

Wilson's post has some interesting links to websites now launching that offer template documents that people can use online. I'll post on this separately later on. I think it's a valid concept for agreements that are truly standard and should be commoditized, such as NDA's. For more sophisticated documents, I believe that there will always be need for some degree of lawyer review and input, to take account of the particularities of a matter, specific client concerns, the law of the jurisdiction, etc. The key is to keep the amount of lawyering in proportion to the importance and complexity of the matter. Technology and templates are not complete solutions but rather, tools that a forward-thinking lawyer uses to offer more value for a lower price. I don't think it is advisable in most cases to go completely lawyerless -- and if you find a good lawyer whose fee structures are reasonable, then you won't feel compelled to try.

Karthik Chandramouli

Fred Wilson (Union Square Ventures) had a great blog post yesterday on this topic:

 

Paperless Financing Docs

Karthik Chandramouli

We should be making documents and startup toolkits such as this available for broader use (i.e., not just for Web 2.0 or software startups), licensed under Creative Commons or another open source framework, to allow companies and founders to get off the ground with a minimum of effort and cost.

 

It will be interesting to see if the legal community continues to support this "commodification" of their services, and how this approach impacts other areas of legal services for startups.

 

Another area that might be helpful is a series of short video clips that explain key elements of these legal documents for the layperson, and address key trade-offs or considerations for doing business in a standardized way vs. potential advantages / risks for deviating from these boilerplate documents.

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