Reinventing the Series A

[This is an Op-Ed piece by Ted Wang, an attorney at Fenwick & West, a Silicon Valley law firm]

There is a new breed of Series A financings. For a number of reasons as described by Josh Kopelman among others, founders are increasing looking to raise $1-$1.5 million to seed finance their companies. The documents which we lawyers use for these financings, however, are the same documents that we would use for a $5 or $10 million dollar Series A. This simply doesn’t make sense The capital at risk in these seed rounds and the likely exit scenario for many of these companies do not merit these same terms.

Why are these deals are still being done on the traditional forms? The most obvious reason is the old adage “that’s the way things are done around here In addition, on any given transaction, it’s more expensive and time consuming to try and come up with a shorter document, than to just use the firm’s form documents. Finally, even if we tried to use a shorter set of documents, we would then burn calories trying to convince the investors’ lawyers why they shouldn’t have the same terms that have been in thousands of other deals. This is, more often than not, a losing battle.

Why hasn’t the market adapted? Some might surmise that the lawyers are just trying to keep their fees artificially high. Believe it or not, this isn’t the case. Start up company lawyers are under an intense pressure to keep our fees low on these deals and we find ourselves struggling meet our clients’ expectations around pricing. The result is that these small Series A deals have become a source of unwanted tension between us and our clients.

In an attempt to break this logjam, I’d suggest a new “simple” Series A that could be used for Series A rounds that are raising less than $1.5 million. The Simple Series A would:

  1. Use 3 documents instead of the traditional 5 by combining the Investor Rights, Voting, and Right of First Refusal agreements into one Stockholders’ Agreement. (We can eliminate duplicative general provisions and schedules and sets of signature pages with a little creative drafting on the amendment provision of the Stockholders’ Agreement.)
  2. Eliminate the registrations rights. ( When was the last time you saw them used by a seed investor?)
  3. Drop the requirement for a legal opinion (It’s a lot of work for an insurance policy on the documents which themselves are an insurance policy for investors)
  4. Eliminate the “closing conditions” (including the Officer’s and Secretary’s certificate) from the Stock Purchase Agreement. (These are vestiges from a time when signing and closing did not occur simultaneously).
  5. Replace the anti-dilution formulae with a reference to those terms as defined in the NVCA forms. (Although there are some variations of each of these, the language itself is hardly ever an issue).
  6. Limit the number of representations and warranties to fifteen. (It will force the investors to choose the ones they really care about and limit time wasted on long disclosure schedules).

I realize that there are arguments against each of these suggestions (and I’d be happy to debate them with you), however, with these smaller transactions I’d argue that the benefit of having these provisions does not outweigh their costs.

Entrepreneurs have adapted to changes in market conditions by looking to raise smaller Series A rounds. We should come up with a standard set of documents to enable these transactions that maintains the basics of the traditional venture capital financing documents, but trims back on some of the less important provisions.

I am willing to take the first step on this one (or the second step after this post). I would be happy to prepare the short form documents for a financing. It takes two to tango, however, so I’ll need an investor that is willing to volunteer for this. Let me know if you’re interested.

[Disclosure: Fenwick & West is a sponsor of VentureBeat]

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