Fred Wilson issued a challenge this morning to startup lawyers: can we close a startup’s seed financing round for legal fees of $5,000 or less?

Yes, it can be done, though I myself fail more often than succeed!

Brad Feld has brought this topic up, too, though I think his last position was that lawyers have to sort this out.

Here’s where I think the rubs are:

  • On the founder and company side, the reps and warranties.

It may be “only” a seed round, and yes the company may have been formed “only yesterday” (in some cases, literally!), but the startup lawyer is going to want the company to be in a position to give some basic reps and warranties. Reduced to essentials, those reps are: the founders and other coders have signed assignment of inventions; founder stock has been issued and 83(b) elections have been filed; if we’re using options to incentivize people helping us, we have a stock option plan and have made the necessary filings; we use NDAs when we’re talking to others, as appropriate; and the company owns the URL and other marks and names that one would associate with the venture.

If you don’t have to do ANY of the work to make those reps true, heck, cut the cap in half and call it $2,500. But you do have to do a lot of that work, usually, unless the founders had the foresight to button all that up as a matter of getting their house in order pre-seed financing.

  • On the investor side, bells and whistles of preferred stock.

The good news is, sophisticated angels are willing to go with a standard, seed variety of preferred stock. The showcase testimony to this is what Marc Andreessen said on Quora, that Andreessen Horowitz has used Ted Wang’s Series Seed docs. Only by not negotiating the preferred stock terms every single time will it ever be possible to get seed round legal fees under control.

In the comment thread to his post, Fred said he has issues with some of the Series Seed terms. In the comments, I suggested that, were Fred to publish a redline to the terms, his iteration would be likely to become standard. But it sounds like he got some resistance from Ted on that, offline.

Understandable that in this struggle, none of us can be fully transparent on all points, because we have to put the confidences of our clients and partners and portfolio companies first. But to meet Fred’s $5,000 challenge, we’re going to have to keep exposing where the differences are and throw light on those differences that aren’t worth the incremental cost.

Attorney William Carleton is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He works with startups and emerging tech companies, their founders and investors. He posts regularly about tech-related legal issues on his blog. Follow him on Twitter @wac6.

More posts by William Carleton

Image via Wikimedia Commons

Comments

  • http://www.naffziger.net/blog davenaff

    William, thanks for the post and your thoughts.

    One important distinction though – Fred was assuming that the company was pre-incorporation.

    All of the docs and filings you are describing would also be stanadardized and included in the $5k.

    If those documents are standardized then I personally believe it could get done for less than $5k. Certainly if the documents already exist there is some real work to validate that all those docs are appropriate. However, if we’re able to get to standardized, versioned legal docs, then the process becomes much simpler and less costly (eg. the company used the ycombinator inventions agreement v1.2).

    • http://www.wac6.typepad.com William Carleton

      Yes, you’re absolutely right, Fred did include incorporation in the package.

      I’d like to hear more about your experience and your suggestions.

      Meantime, I’m a skeptic on keeping it below $5,000 if you include the organizational stuff, too.

      If you’re dealing with only a single founder who is doing all the work and not involving anyone else on any aspect of the business, $5,000 for corporate organization PLUS seed financing might be doable.

      That cap is not realistic, in my view, where you have co-founders and other people helping with the business. Even if everyone always agrees 100% with the boilerplate that is put in front of them (I suppose lightning does strike once in awhile!), it’s important to the company that the founders, contractors, option holders, etc. understand what they are signing. Usually there is work just getting the exhibits to the assignments of invention done right. I won’t even mention 83(b) elections!

      • http://www.naffziger.net/blog davenaff

        83b elections? Is there anything in a financing/incorporation more boilerplate than those?

        My experience is pretty limited – a founder of a handful of companies and an investor in a handful others, but only once as a lead.

        I certainly think that financings under $5k are doable, but I recognize that it can’t be accomplished by entrepreneurs alone. It requires enlightened entrepreneurs and investors as well.

        • http://www.wac6.typepad.com William Carleton

          83(b) can and continues to be confusing for people, especially those
          dealing with it for the first time. Agree with you about investors
          needing to buy in to standard documents. So far, the Series Seed
          templates are working best for me on that score.

  • http://www.theventurealley.com/ Trent Dykes

    Bill, great post and topic. I agree that seed round deals can (and do) get done with $5k in legal fees (and sometimes less). I think Dave hit an important caveat though that “it requires enlightened entrepreneurs and investors” – as costs can increase if both sides of the deal don’t already have a working knowledge of what it is they are being asked to sign.

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