A variety of model startup seed funding docs have been released in the past year or so: TechStars Series AA Preferred, YCombinator Series AA Preferred, and TheFunded Founder Institute’s Plain Preferred. And as I mentioned last week, Fenwick & West and Andreessen Horowitz released the Series Seed model documents.
The standardized seed funding document movement is great and I fully support it.
So now you have more docs to choose from, and maybe more to be confused by. I have and will continue to use these document sets when a client requests. But there are a few myths about standardized seed funding docs, both in terms of their use and their effect on the legal landscape:
Myth #1: Startup Lawyers Hate Standardized Seed Funding Documents Because it Reduces their own Payday.
The premise here is simple: complicated/long docs = $$$ for lawyers.
But lawyers don’t make documents complicated to pad the bill. Legal documents can get “complicated” because of the potential issues that may arise pre- and post-transaction. If these issues didn’t actually happen, the documents wouldn’t be longer or more complicated.
For example, a founder stock purchase agreement is 12+ pages long because founders can, have, and will fail and/or bail on startups (hence the vesting schedule & startup repurchase option). When an issue like this occurs at your startup, you’ll be glad your documents are “complicated.”
Each time a new set of docs get released, I don’t cringe because it means I then have to remove the hockey stick from my revenue projections. I welcome these and future standardized seed funding docs because they provide entrepreneurs with the chance to take a look at financing terms. And since the model seed funding documents aren’t as cumbersome as those used in a typical Series A Round, I find that entrepreneurs tend to actually review them. Clients come better prepared now.
An educated entrepreneur is a better entrepreneur. And better entrepreneurs build more successful startups. Startup lawyers (myself definitely included) take the long-term view and want to see our clients succeed.
(Note: If you believe your lawyer is making documents complicated and long for the sake of his or her payday, ask your lawyer about the documents and the need for their complexity/length. If your lawyer’s answer isn’t good enough for you, then find a new lawyer. Of course, you can also ask for fixed-fee billing.)
Myth #2: Standardized Docs Reduce the Need for a Startup Lawyer
This myth is usually offered by someone who thinks lawyers are just gatekeepers of the legal document vault. There is no “walled garden” when it comes to legal documents. You can easily get legal documents via Lexis, Westlaw, Edgar, or any relevant legal treatise.
If you believe lawyers are simply document gatekeepers, you are missing the entire reason for hiring a lawyer — counsel. If you aren’t asking for counsel, you aren’t using your lawyer right. If your lawyer isn’t providing counsel, you have the wrong lawyer.
No set of seed funding documents will replace counsel, either pre-financing or post-financing. But in the event one of you genius hackers does this, please consider me for a job at your startup.
Myth #3: Standardized Docs = Open Source Law.
“Open Source Law” is a buzz phrase thrown around frequently, but what the legal profession is experiencing is more of an automation of various parts of the law practice….not the entire practice of law. There will always be demand for good counsel.
While the practice of startup law isn’t rocket science, it is nevertheless complex. In addition to understanding the provisions of your particular agreement, you have to know (i) what is missing from the agreement, and (ii) how the various provisions, situations, people, and investment amounts interact and may affect other off-document rules and issues. It’s difficult to do this unless you do this frequently.
Law firms are no more immune to open sourcing than any developer, engineer, or pixel pusher. But it doesn’t mean we’ll all go away, we’ll just adapt by providing more value. Those that manage this feat will survive.
Myth #4: Standardized Seed Docs are Appropriate for My Startup’s Raise.
First, most if not all the model seed docs assume your startup is a Delaware corporation. Thus, you are going to have to either edit the docs or reincorporate your startup in Delaware to use them properly. (Next up: the model reincorporation merger kit)
Second, the model seed docs tend to impress upon the entrepreneur that preferred equity is the best angel investment structure. That may be so, but convertible debt can also be appropriate for your startup’s angel round.
However, most (all?) sophisticated investors will not invest via a convertible note. And since the people & groups behind these model seed funding docs are some of the most sophisticated angel investors in the world, preferred equity investment model docs are being released.
Since entrepreneurs trust groups like TechStars and YCombinator, there is the tendency for startups to blindly use these docs, without considering alternatives like convertible debt. To their credit, these groups have earned entrepreneurs’ trust and have altruistic reasons for their release. Nor do they push these docs as “must use” docs.
Nevertheless, entrepreneurs should still consider whether a model seed funding document set (preferred equity) is prudent relative to their startup’s situation.
I support any effort to bring transparency to the law firm establishment and otherwise educate entrepreneurs (including model seed funding documents). That’s one of the reasons why I started this blog in 2006. You can’t be a startup lawyer and not want startups to have a better chance at succeeding. Model seed funding docs help entrepreneurs, but not to the detriment of startup lawyers.