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An attorney and a group of early-stage investors published a set of documents last night called the “series seed” documents, a set of contracts for raising a small, seed round of funding.
Ted Wang of law firm Fenwick & West first called for a streamlined early funding process in 2007, with an editorial for VentureBeat titled, “Reinventing the Series A.” The problem, he said, is that the legal hassles and costs don’t change much between a large, institutional venture round and a much smaller seed investment — but it doesn’t really make sense to spend tens of thousands of dollars on legal fees if you’re only raising $500,000.
“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,” Wang wrote back in 2007. “The result is that these small Series A deals have become a source of unwanted tension between us and our clients.”
There have been other attempts to improve the process, such as incubator Y Combinator’s creation of standardized legal documents for angel funding. But Wang said his approach — developed with the advice of other Fenwick & West attorneys as well as a number of investors — is “a little more radical.” Specifically, it streams down the standard contract from 100 pages to 30 pages and cuts legal fees from the tens of thousands of dollars to around $7,000.
To do that, Wang said he stripped out “a lot of historical things from the last 20, 30 years that are not relevant anymore.” Here’s one example Wang offered: Most funding term sheets build in a variety of investor protections for every possible scenario. But for a seed round there are really only two likely outcomes, he said — the company folds, or it makes it to the point where it can raise a bigger institutional round. In the former case, your investment isn’t worth anything, and in the latter the company’s valuation should go up. Either way, there’s no need to include anti-dilution protections in case the company raises more money at a lower valuation.
New venture firm Andreessen Horowitz said it plans to use the new documents. The firm’s chief operating officer Scott Kupor told me the documents mean Andreessen Horowitz can make investment decisions based purely on the worthiness of the deal and on the firm’s business resources — the potential legal hassle is no longer a constraint. And Kupor said he’s comfortable giving up some of the rights Wang mentioned because the documents are written in a way that if more investor protections are added in the next round, the seed investors receive them too. Two already-announced seed rounds used the Series Seed documents — “Twitter for credit cards” Blippy and solar distributor CivicSolar.
Wang added that he considers these to be “open source” documents, open to criticism and adaptation. Even among the supporting firms, there will probably be some variation in when the Series Seed documents are used and how closely they are followed.
“We’re not trying to force these down anyone’s throat,” he said.
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