My 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 standard series of documents, this time by Ted Wang at Fenwick & West with collaboration from a group of bay-area early stage VC’s and angel investors.
If you are keeping score at home, there now exist the following sets of standards that have been made public:
- TechStars Model Seed Funding Documents (by Cooley);
- Y Combinator Series AA Equity Financing Documents (by WSGR);
- Founders Institute Plain Preferred Term Sheet (by WSGR); and
- Series Seed Financing Documents (by Fenwick & West).
(**Disclosure: I had participation with the TechStars set**)
Brad noted that it seemed silly to have four different versions and decided to invite everyone together in a room to come up with one, universally accepted set of model documents. The immediate response was tremendous. 33 comments to the post and countless more emails from lawyers, entrepreneurs, VCs all praising the effort and wanting to know how they could get involved.
And all I could think was “Feld, you haven’t a clue what you’ve gotten yourself into. This is going to end badly.” (and then the second thought was “Damnit, I bet all of these emails end up in my inbox too,” which they did, but then gave me fodder for this blog).
Why? Because there will never be a standardized set. Not because there shouldn’t be, but rather once you introduce humans to execute the task, it simply doesn’t work.
And those humans are called lawyers and venture capitalists (and not entrepreneurs). Despite all the handwringing about “doing it for the entrepreneur” I don’t think these two sets of humans will ever get their act together well enough to do what they say they want to do. Here is why.
Lawyers are like congress people. If they aren’t involved in something, it’s nearly impossible to get their vote. If they are involved then they are obliged to be “value additive” to the process. In other words, the more lawyers, the more support and the more bloated of a document set, because everyone needs to get in a point to save face.
If you don’t believe me, see the NVCA model documents (I’ve been in the room while they have been drafted). While the documents are great in that every potential scenarios has been imagined (and even more importantly to show you what should never be included in financing documents by their omission), the documents are too complicated for 90% of the folks out there doing the deals. And then you add in the east-coast / west-coast differences (I think many east-coast terms can be entrepreneur unfriendly) and now you have a treatise as opposed to streamlined set of documents. (As an aside, I don’t want this to turn into a east coast / west coast debate. If you want to see what I think about terms, read this series).
Many of Brad’s email responses included this not-so-veiled threat: “you need me as part of your syndicate, or I won’t sign off on the documents and you’ll not have broad support. My firm is important [insert canned marketing paragraph here].” At the end of the day, Brad would have had 50+ lawyers in the room and we’d be right back to where we started with the NVCA project.
Even more importantly, however, lawyers are driven by more important things (to them) than helping entrepreneurs save legal costs. Lawyers are driven by fees and thus they want to acquire more clients. Releasing a set of documents that get you on the cover of peHub and Techcrunch is good for business. You may streamline some hours, but you are betting on more clients.
Therefore, you have no incentive to join other groups, as it’s your name that is getting all the good publicity. Why be a part of “working group X” when you can be “Joe Smith, super lawyer to the entrepreneur?” While I can’t disclose the particular emails, rest assured that this paragraph is much more than an assertion, but a fact.
Lastly, there is also pride of authorship, by lawyers, even in situations where the documents should be boilerplate – as the case is here. Every firm has their set of documents that they consider “better” than others. Are they? Or are they lazy and haven’t even read the other firms’ (or maybe they don’t have access). I haven’t read them all. I don’t want to either, but I can tell you that I’ve only seen a few firms out there that actually have better forms.
Bottom line: Too many cooks spoil the soup, while the celebrity chefs don’t even want to cook with you.
Let’s not let the lawyers take all the blame, though. While I do think the incentives of the VCs are good here, we have our own issues.
First, we, as the business drivers of the provisions, can’t necessarily agree on the basic terms. That is problem one. I don’t have a way to fix this one.
Secondly, most VCs aren’t lawyers and their level of deal comprehension varies greatly. (Note: there are plenty of non-lawyer VCs that can take me to the woodshed, so this isn’t a statement that all lawyer-VCs are better). So what do we, as an industry do? We hire lawyers to produce a standard set of forms that we might not completely understand ourselves.
The end-result is our trusty lawyer tells us “our forms are better” and we take it for granted never minding the misalignment of incentives (lawyers want to make money, we want to save money for the entrepreneurs). In fact, if you ask some of the business people around the table of these four sets, they really can’t tell you how any of these documents differ from the others. They will always refer you to their lawyer.
Want more proof? The latest set of documents from Fenwick and supported by a number of investors has a provision allowing for $10k of investor counsel fees. If the investors really understood everything in the documents and were prepared to take them “as is” I would expect that number to be zero. In fact, the three other sets of standardized documents have $0 fees for investor counsel.
Bottom line: until the VCs truly understand everything in these documents, they are going to continue to rely on the forms of their favorite lawyers and not those generated by others.
So which of the four forms are better to use? I don’t know. I’ve only read half of them. And I don’t really have the burning desire to read more of them, as I predict even more proliferation. That being said, here are a couple of interesting factoids.
1. Yokum Taku has a nice post and matrix comparing the documents; and
2. I heard from one name-brand law firm that working with one of these standardized sets (which I won’t name either for professional courtesy reasons) is a horrific experience in spell checking, capitalized term mismanagement and sloppy draftsmanship. So just because they are released and publicized doesn’t mean they are necessarily any good.
So my prediction? My dear partner Brad, while heart in the right place, will fail to come up with one set of widely used seed documents. Sad, but true.
Of course the horrible irony is that none of this is intellectually difficult. Maybe I’ll just come up with my own set of documents and…. oh wait……