SeriesSeed.com

Version 2.0 and why Series Seed Documents are better than capped convertible notes

“First they ignore you. Then they laugh at you. Then they fight you. Then you win.” Mahatma Ghandi

I hesitate to use a quote from one of the greatest people ever to grace planet earth, and certainly the question of how to structure early stage investment is a laughable cause as compared to the rights that Ghandi (also a lawyer) fought to advance.  That said, I think this quote accurately captures the life-cycle of creating a simple set of documents for early stage investment.

I’ve attached version 2.0 of the Series Seed Documents as well as a red-line showing the changes I’ve made from the original set.  If you peruse the red-line, you will see that there are not many changes.  That’s because there are not that many issues to negotiate in a simple equity financing.  Of course, one could argue, that I’m just not taking comments I disagree with (or that nobody cares enough to comment), but I am of the opinion that these documents represent the 95% consensus of what should be in a very basic set of equity financing documents.  Based on the comments received, both on the blog and in the many deals in which these documents have been used, I am convinced that the terms of a simple set of equity documents are really not an issue.  I don’t mean to say that the Series Seed are infallible, but there are no major objections to their content.

Why use Series Seed Documents instead of capped convertible debt?  This seems to be the real issue.  In my opinion, the reason that capped convertible debt is the current market leader is that entrepreneurs have been conditioned over time to believe that convertible debt is (a) faster (b) cheaper and (c) better for them than equity investment.  This is EXACTLY why I created the Series Seed Documents.  With Series Seed:

·    Costs should be roughly the same (if not cheaper) than using industry standard debt documents.  There are a number of different convertible debt documents out there and there will likely be some back and forth whereas these are standard documents.

·    Same point for speed.  If parties agree to Series Seed Documents, should be faster than debt documents since there is some negotiation with debt documents from sophisticated investors.

·    Series Seed Documents are transparent: no hidden gotchas can get served up in definitive documents.  You can review the right now if you want.

·    Equity documents give investors more clear definition around rights, more stability and less potential squabbling in the next round.

·    Equity gives investors the opportunity to get long term capital gains tax treatment if early exit.

·    With minor manipulation, Series Seed enables multiple board structures without tortured and non-functioning agreements (a real problem for convertible debt documents); and

·    Entrepreneurs get price certainty instead of the lower of two different prices as with capped debt.

In sum, Series Seed creates a level playing field between capped debt and equity documents in terms of speed and cost.  When one studies the (admittedly highly technical) benefits of Series Seed vs. price debt, Series Seed is a better solution.

There has been a robust debate on this topic with folks like Fred Wilson, Paul Graham and Seth Levine all chiming in.  To clarify, there is no question that as an entrepreneur you would prefer uncapped convertible debt to equity.  As Josh and many others point out, this is typically not a fair deal for the investors and many investors won’t do it, or will only do it for people that they are blindly in love with.  Also, Seth raises some interesting points about ecosystem health, though most entrepreneurs I know aren’t too concerned about killing the golden goose. Once a price cap has been introduced, however, Series Seed Documents are a better solution to getting the first round complete for both entrepreneurs and investors. 

Redlines

Redline - Series Seed COI (1 v. 2)

Redline - Series Seed IRA (1 v. 2)

Redline - Series Seed Term Sheet (1 v. 2)

Series Seed Documents

Series Seed COI (v 2.0)

Series Seed IRA (v 2.0)

Series Seed Term Sheet (v 2.0)

Series Seed Form SPA

 BEFORE DOWNLOADING THESE DOCUMENTS PLEASE READ THE DISCLAIMER



Disclaimer

Neither I nor Fenwick & West, LLP assumes any responsibility for any consequence of using these documents. These documents have been prepared for informational purposes and is not intended to (a) constitute legal advice (b) create an attorney-client relationship (c) be advertising or a solicitation of any type.  Each situation is highly fact specific and requires a knowledge of both state and federal laws and therefore any party should seek legal advice from a licensed attorney in the relevant jurisdictions.  Both I and Fenwick & West expressly disclaim any and all liability with respect to actions or omissions based on this website.

Step 2 (as opposed to version 1.1)

 Redline - Series Seed v. Series Seed to Series A COI 

 Redline - Series Seed v. Series Seed to Series A SPA 

  Redline - Series Seed v. Series Seed to Series A IRA 

 

BEFORE DOWNLOADING THESE DOCUMENTS PLEASE READ THE DISCLAIMER

Disclaimer

Neither I nor Fenwick & West, LLP assumes any responsibility for any consequence of using these documents. These documents have been prepared for informational purposes and is not intended to (a) constitute legal advice (b) create an attorney-client relationship (c) be advertising or a solicitation of any type.  Each situation is highly fact specific and requires a knowledge of both state and federal laws and therefore any party should seek legal advice from a licensed attorney in the relevant jurisdictions.  Both I and Fenwick & West expressly disclaim any and all liability with respect to actions or omissions based on this website.

 

One of the most difficult decisions in creating the Series Seed Documents was whether to make them a very simple version of traditional Series A documents or a more radical departure from the traditional format (to the extent that corporate finance legal documents can be referred to as radical).

I opted for the latter approach for a number of reasons.  First, I thought it would be best to make these documents as simple as possible.  Second, I wanted the documents to human readable (as opposed to lawyer readable) and there are certain provisions of a vanilla set of Series A financing documents that are just too dense for most civilians to get through (e.g. price based  anti-dilution). Third, although the more simple documents require more tweaking in the next round of financing, that next round of financing should be a bigger round with resources where such investment would be appropriate.  Let’s imagine that using the more simple documents saves 10% of the time and money involved in a seed financing.  Even if it takes 20% more time to add a full set of provisions in the next round, that’s a good deal because (a) fewer than 50% of seed financed companies make it to the next round and (b) the dollars in the next round are less dear at that time, since it is a larger fundraising.

Accordingly, in this post I’ve attached a sample of the Series Seed Documents with  a traditional set of financing provisions added.  

What these documents are:

So the purpose of these documents is to give a legal practitioner an example as to how to drop traditional financing terms into the Series Seed Documents.  I based these documents off a recent transaction where a company that had used the Series Seed Documents raised a Series A round.  As expected, that deal took a bit longer than it would have had the Company raised a vanilla  Series A to begin with (and subsequently raised a Series B) but the aggregate fees for the two transactions were still less than the standard Series A followed by a Series B.  Moreover, with a good roadmap to follow, these costs elements will decrease over time.

What these documents are NOT:

It is important to note that these documents are just intended to be instructive as to how to go from a Series Seed to a Series A.  I am not intending to standardize Series A terms.  For this reason, I’ve not included a Right of First Refusal and Co-Sale Agreement or a Voting Agreement, both of which are typical in a Series A financing.  It should be noted that the Drag Along and ROFR provisions in the Series Seed Documents should wind up in the Voting and Right of First Refusal Agreement, respectively so they appear to be deleted from these documents.  Also, I’ve gotten a lot of request to post other form documents online. Keeping a full library of up to date form documents that comply with various state requirements is way out of scope.  The Series Seed project is about standardization of a simple equity financing transaction.  I do not intend to go beyond that.

Additionally, these documents are not version 2.0 of the Series Seed Documents.  I will have that out by the end of summer.  I’ve received numerous helpful comments both on the blog and via email and if you have any more to share, please do so.  

How’s it going otherwise?

I've gotten very good feedback from my partners and other practitioners about the Series Seed Documents.  I’ve used these documents a number of times in my own practice and I can tell from the statistics at www.SeriesSeed.com that many folks have downloaded them.  If you have any success stories to share, let me know.  I'd love to hear about it.

My expectation around these documents is that they will take about 5 years to gain mainstream adoption.  Even with my great launch partners using them, it takes time for a new standard to emerge.  I'm hopeful that tools like this Series Seed to Series A roadmap, will help make that happen.  If you have any suggestions, let me know.  

Series Seed Financing Documents

Series Seed COI (v 2.0)

Series Seed IRA (v 2.0)

Series Seed Term Sheet (v 2.0)

Series Seed Form SPA

Please note, these are the latest versions of the Series Seed Documents.  The older versions have been removed to avoid confusion.

 BEFORE DOWNLOADING THESE DOCUMENTS PLEASE READ THE DISCLAIMER



 

Disclaimer

Neither I nor Fenwick & West, LLP assumes any responsibility for any consequence of using these documents. These documents have been prepared for informational purposes and is not intended to (a) constitute legal advice (b) create an attorney-client relationship (c) be advertising or a solicitation of any type.  Each situation is highly fact specific and requires a knowledge of both state and federal laws and therefore any party should seek legal advice from a licensed attorney in the relevant jurisdictions.  Both I and Fenwick & West expressly disclaim any and all liability with respect to actions or omissions based on this website.

About the Series Seed Documents

A decade ago, a company would need to raise a couple of million of dollars to create a new product and effectively bring it to market.  Today that amount is dramatically smaller.  The advent of cloud computing, open source software, platforms with APIs, and numerous other changes have lowered the cost of launching a new enterprise.  For this reason, startup companies are now raising significantly less capital – and many investors have begun to focus efforts on this smaller early stage investment – which typically ranges from $500,000 to $1.5 million.

Yet amidst all these other dramatic changes, one aspect of startup life has not changed at all:  the legal documents used for financing these transactions.  A typical venture capital investment package consists of five documents:  two certificates, a legal opinion and two consents, and is roughly 100 pages long (excluding signature pages).  These documents provide for a range of rights, preferences and privileges, some of which are vitally important to protect the investment from the outset and others of which do not become important until after the company has gone public.  This level of investment in financing documentation made sense when the investments were $3 million to $5 million, but for these smaller seed stage rounds, it’s simply overkill.

The Series Seed Documents have been created to address these issues.  They are considerably shorter and simpler than the status quo investment documents, designed to keep the most essential terms for the transaction and postpone the other terms for a later fundraising round where such an investment would be warranted.  A more detailed description of the content of these documents and rationale behind them can be found here. 

 

The Series Seed Documents should reduce both the time and cost of a financing transaction.  It should go without saying, but time and money are the two things most vital to a young company. 

From an investor’s perspective, while moving away from the traditional full-blown financing documents entails giving up a number of rights and protections, when taken across numerous transactions, the benefits of spending less time and money on the documents outweigh the cost of sacrificing these additional rights and protections.  Moreover, I don’t believe there’s anything included (or excluded) in these documents that will be wildly controversial.  Based on discussions with numerous practitioners, I believe these documents largely represent a consensus as to what should be in seed round documents.  Additionally, I plan to “open source” the documents so that they can be continually improved by suggestions from the community.

 

A few principles have animated this approach: 

 

·   First, these documents are intended to be fair, favoring neither the investors nor the entrepreneurs.  Any comments to the contrary or other suggested improvements can be made at the Series Seed blog; and I’m committed to periodically revising the documents to reflect such comments. 

 

·   Second, they are simple.  Under the status quo, only the hardiest of entrepreneurs could reasonably be expected to slog through 100 pages of financing documents.  The Series Seed Documents are only 30 pages in the aggregate so that an entrepreneur can read and understand them without devoting an inordinate amount of time and energy. 

 

·  Third, these documents are “fill in the blank,” meaning that they are intended to be used as-is without any further negotiation other than completing the requisite information necessary to make the documents accurate.  Although there are costs in adopting a uniform approach in any single case, when taken over a large number of transactions, the aggregate value of standardization outweighs this cost.

 

·   Finally, using the Series Seed Documents will increase transparency.  Since these documents are available online, any entrepreneur or investor can now sign a term sheet with confidence that there are no hidden “gotchas” in the next stage of the process.

 

Some points of clarification about this project.  First, these are not Fenwick & West or my own form documents.  Although I undertook the laboring oar (with the assistance of Khang Tran) and many of my colleagues at Fenwick & West have assisted me in the original drafts, these documents are intended to be an open source project and not particular to any lawyer or law firm.  Similarly, this is not an Andreessen Horowitz undertaking.  Although I am pleased to have the firm’s support in launching this effort, the Series Seed Documents will require broad adoption in order to become an effective standard.  The following investors have agreed to use the Series Seed Documents in certain of the their deals:  Baseline, Charles River Ventures, SV Angel (Ron Conway), First Round Capital, Harrison Metal Capital, Mike Maples, Polaris Venture Partners, SoftTech VC and True Ventures.  None of these investors intend that the Series Seed Documents be the only way to document a transaction, as there are a variety of scenarios where a more fulsome set of documents or another alternative structure would be preferable to either the investors or the entrepreneurs.  Finally, please see the disclaimer.  While I’m happy to make these documents available, they are yours to use at your own risk.

 

In conclusion, I feel very fortunate to be a part of the startup company ecosystem.  Drafting these documents is a small way that I have sought to give something back to the community.  I hope people find them useful and I look forward to working to improve them.

For the Faithful

Overview

The Series Seed Documents are a standardized set of documents that can be quickly and easily deployed for a seed investment:  to help get a company financed properly, legally quickly and intelligently.

 

Up until now, various smart people have talked or blogged about reducing the transaction costs associated with seed stage investment without rallying around a particular attack. Of course both entrepreneurs and investors would rather see their investment dollars used toward developing a new product and bringing it to market than toward what are usually routine transaction costs.  The problem has been crafting a set of documents that provide adequate protections without being unduly burdensome.  [more...]