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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

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