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 (
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.