5 ms·

It's not that surprising when you understand where the money goes. It's not spent on preparing documents, but on arguing about terms. It's really the cost of

by pg 17y ago

It's not that surprising when you understand where the money goes. It's not spent on preparing documents, but on arguing about terms. It's really the cost of the negotiations between termsheet and closing, to the extent they're done through lawyers. The solution is to make deals more standardized, so that when you see the termsheet you know what the deal's going to be. That would be good for other reasons besides saving money. The time it takes deals to close is very damaging to startups. I'm convinced most investors have no idea how damaging. A startup raising money will get next to nothing done till the deal closes, and getting nothing done is the worst possible thing that can happen to a startup.

anamax 17y ago
A set of standard contracts would be great, but it would also be nice if there was a "why are these things in here and what do they all mean" document for each contract.
rlucas 17y ago
I quite disagree WRT legal fees and what causes them (I am a VC, not a lawyer, believe it or not). The substantive terms usually get argued about, up-front, by the business people (VC and entrepreneur). It's true that there are ambiguities left even by a detailed term sheet. However, decent attorneys go with what's "market" for a given type of deal and don't spend a bunch of time on it. What really kills you is that there are almost always a ton of i's to dot and t's to cross, things that entrepreneurs (and for that matter, VCs) don't and shouldn't care about (so long as they get done, by hook or by crook). For example: do you have your articles filed correctly? Up to date? Foreign corporation authorization in your physical location? Minutes from regular board meetings? Properly issued stock certs and register? Voting agreements / etc. from all cats-and-dogs shareholders (angels, uncle Larry, etc.)? Options properly approved, issued, expensed? Right number of shares authorized for each class and type, and for all options and warrants? blah blah blah blah blah. And that's even before you get to stuff like reps and warranties. Screwups on any one of these things, conceivably, could allow someone or some government to screw up the deal later on, even if the business takes off. Don't think of the definitive documentation of a round solely as a hangup en route to getting the wire. Think of it as a cleansing ritual where you pay the high priests to go back, expurgate your sins and omissions by papering over them, and make sure you don't end up going to jail or getting sued by the SEC later. Having your round definitively documented by non-dipshit attorneys basically gives all sides a reasonable comfort that the legal risk in the deal is low. It's a PITA, yes, but it does good for all parties involved. The "make deals more standardized" trope is oversimplified. It could work, yes, but only if the deal used a precise template for the ENTIRE history of the company, from ideation to handshakes to incorporation to seed money to A round. Since that can't be so, removing the legal risk is just going to require tens of hours of smart people slogging through paper and data. Now -- should the VCs pay for this out of our piece or not? Look, frankly, we want to get our 20% for $2 M (or whatever). If you insist, I suppose we could reduce the premoney a tiny bit, get our 20% for $1.95 M, and pay the $50k out of pocket. You get the same net cash for a lower putative valuation, I'm still out $2 M. Frankly: it's not worth the brain damage, just do it the way every other deal has been done. (I'm only replying because I'm in an ornery mood and too caffeinated to resist the bait right now...)
- pg 17y ago
  Good point. The money doesn't all go to negotiation, so standardized terms wouldn't eliminate all the cost.

by pg 17y ago

anamax 17y ago

A set of standard contracts would be great, but it would also be nice if there was a "why are these things in here and what do they all mean" document for each contract.

rlucas 17y ago

I quite disagree WRT legal fees and what causes them (I am a VC, not a lawyer, believe it or not). The substantive terms usually get argued about, up-front, by the business people (VC and entrepreneur). It's true that there are ambiguities left even by a detailed term sheet. However, decent attorneys go with what's "market" for a given type of deal and don't spend a bunch of time on it. What really kills you is that there are almost always a ton of i's to dot and t's to cross, things that entrepreneurs (and for that matter, VCs) don't and shouldn't care about (so long as they get done, by hook or by crook). For example: do you have your articles filed correctly? Up to date? Foreign corporation authorization in your physical location? Minutes from regular board meetings? Properly issued stock certs and register? Voting agreements / etc. from all cats-and-dogs shareholders (angels, uncle Larry, etc.)? Options properly approved, issued, expensed? Right number of shares authorized for each class and type, and for all options and warrants? blah blah blah blah blah. And that's even before you get to stuff like reps and warranties. Screwups on any one of these things, conceivably, could allow someone or some government to screw up the deal later on, even if the business takes off. Don't think of the definitive documentation of a round solely as a hangup en route to getting the wire. Think of it as a cleansing ritual where you pay the high priests to go back, expurgate your sins and omissions by papering over them, and make sure you don't end up going to jail or getting sued by the SEC later. Having your round definitively documented by non-dipshit attorneys basically gives all sides a reasonable comfort that the legal risk in the deal is low. It's a PITA, yes, but it does good for all parties involved. The "make deals more standardized" trope is oversimplified. It could work, yes, but only if the deal used a precise template for the ENTIRE history of the company, from ideation to handshakes to incorporation to seed money to A round. Since that can't be so, removing the legal risk is just going to require tens of hours of smart people slogging through paper and data. Now -- should the VCs pay for this out of our piece or not? Look, frankly, we want to get our 20% for $2 M (or whatever). If you insist, I suppose we could reduce the premoney a tiny bit, get our 20% for $1.95 M, and pay the $50k out of pocket. You get the same net cash for a lower putative valuation, I'm still out $2 M. Frankly: it's not worth the brain damage, just do it the way every other deal has been done. (I'm only replying because I'm in an ornery mood and too caffeinated to resist the bait right now...)

pg 17y ago
Good point. The money doesn't all go to negotiation, so standardized terms wouldn't eliminate all the cost.