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.
It would great to have a short FAQ that covered some of the most common terms that were included or omitted and why. You've obviously done a lot of thought about what was essential and what not and this would give confidence to users without having an attorney reanalyze, but rather contribute as to whether these documents will fit the bill for the specific situation.
I would be interested to see the names of companies that adopt these documents.
We've all spent numerous weeks and dollars on setting up companies. This is a great contribution to accelerating (early) success. Thanks.
Posted by: bob dolan | 03/02/2010 at 01:01 PM
This is truly a wonderful service to the community - I salute you and will recommend it to ALL my startup clients for their perusal and use! :)
Cheers, JH
Posted by: Jonathan Hirshon | 03/02/2010 at 10:13 PM
Efficient and economical for angels and entrepeneurs, kudos! Two questions:1. Antitrust -just posting open source forms and encouraging use as a starting point would be a non-issue. Encouraging a no-negotiation, just fill in the blanks approach, then enlisting an honor roll of angels to use the forms might be problematic. Consider the entrepeneur who, for whatever unique reason, can't live with one of the standard terms in the form. Will he or she be turned away by every angel on your list because all are committed to the economy of using the "pure" form? Sounds a little like a group boycott. Even if the forms are "fair" (is there an objective "fair", or is just today's "market"), it's not an antitrust defense. Your firm knows far more than I about antitrust, what do you say to a client with this concern? 2)any thoughts or news on form packages for L3Cs or other not-for-profit/profit hybrids?
Posted by: Mike Hassett | 03/03/2010 at 09:18 AM
This is quite useful, at the very least as a flexible guide. BY contrast, to quote a Venture Hack; "GET A LAWYER". Thank you for this generous service!
Posted by: Wyatt | 03/04/2010 at 10:19 AM
Excellent tools !
Thank you very much !
Connect me by any means.
All right ?
Jg
Posted by: Matrix2007 | 03/04/2010 at 02:45 PM
This is great!
It should have been created a long time ago, it now seems so obvious, thank you Ted for this great service to the Tech world!
I'm in the process of raising a seed round, I'll do my best to convince the investors to use these docs.
Actually, as next step, it would be great if you could provide open source docs for all the other usual suspects: stock option plan, stock option agreement, NDA, employment letter, etc
Any chance for that?
Posted by: NicolasVDB | 03/08/2010 at 12:56 PM
I wholly agree that simpler documents need to be used in smaller rounds. The portrayal of such docs as easy that only require to "fill in the line", however, gives the entrepreneur a false sense of security. And unfortunately, many will be enticed to use these docs without the help of an attorney, while the investors will have attorneys on their side making sure the terms are favorable to them.
As an attorney to tech start-ups I fixed quite a number of broken self-handled financing rounds at a significant cost in both $ and terms. In numerous instances, however, the founders dealt themselves a lethal blow (to the delight of later stage investors) from which recovery was impossible.
Roman
Posted by: Roman | 03/09/2010 at 12:33 AM
Ted, not sure the best way to contact you, so I'll leave a comment here. I just closed an angel round (that I led on the angel side) using the series seed docs in pretty much verbatim form. Super helpful, thx. Upon review, we noticed a few minor things you might want to take a second look at it.
--On the COI, 1.3.2 you reference a non-existent Merger Agreement. We changed to "agreement or plan of merger or consolidation for such transaction"
--On 2.3(b) I like your language but "of Common Stock or Preferred Stock (or any series thereof);" However, it does not match with the term sheet language "; (ii) change the authorized number of shares of Preferred Stock; (iii) authorize any new class of series of Preferred Stock having rights senior to or on parity with Preferred Stock; (iv) ". Can you reconcile?
--Is there a reason you left out boiler plate stockholder and director consents? Those would have been useful.
--Finally, on the term sheet I'd consider adding (optional) binding Exclusivity and Confidentially clauses, which we did.
Thx again,
Gabriel, http://ye.gg/
Posted by: Yegg | 04/23/2010 at 10:15 AM
Thanks for your helpful comments! Glad you found these useful. I am working on a bug fix release and will review all of these changes (I've got a handful of other nits). Board and SH consents are a good idea and are on my roadmap.
Good luck with your company.
Posted by: Ted Wang | 04/23/2010 at 11:40 AM
Actually, as next step, it would be great if you could provide open source docs for all the other usual suspects: stock option plan, stock option agreement, NDA, employment letter, etc http://www.rapidskunk.com
Posted by: Bert | 04/26/2010 at 10:01 AM
So that's how its done in Silicon Valley. Great for investors and perhaps fair for entrepreneurs. As an Entrepreneur I have a much better appreciation for our lawyers who drew up a set of documents where our investors have absolutely no rights whatsoever. I especially liked the Voting Trust and Power of Attorney giving Company Management right to vote for all shareholders in any matter. "Investors will sign this?" I asked. - Lawyers - "You don'twant to be running around asking for permission on anything especially at an IPO or Acquisition event."
Posted by: Dennis Meharchand | 07/28/2010 at 03:24 AM