Crowdfunding and the Benefits of Standardized Documents
Traditionally, running an investment round has meant a lot of work with the legal documents. Getting the Term Sheet and Shareholders’ Agreement into such a document that all parties agree on, can mean a lot of work and legal costs. Quite often it’s also the investors who bring the initial document on the table (as often the entrepreneurs don’t have those in the first place).
But what is the definition of a standardized document?
For me it is a document that is acceptable for all parties (investors and entrepreneurs alike) as such, without any tough negotiation concerning the key issues. The parties could just select between some key options (like in this Term Sheet Generator) and fill-in the blanks, such as the company name, valuation and the amount of funding.
With the “old way”, agreeing on the Term Sheet and the creating the actual financing documents requires a lot of legal work. Given the cost of that, the funding round itself really has to be millions of dollars or euros. Which means this process by no means is applicable with the crowdfunding model. Paying more than 10,000 € for the lawyer to close a financing round of 100,000 € really makes no sense!
Standardizing the deal documents would solve a huge part of this. Also, if the lawyers acknowledged that they aren’t adding much value at this level (e.g. it’s a simple negotiation and a straightforward thing to document), you could get to a place where lawyers should be able to do this for a low fixed price (say, $10,000). However, this has to be done at the legal level, or you don’t really solve the fundamental issue. Sure – you theoretically can streamline the process by starting with a better “form” that has been “pre-negotiated” (e.g. take it or leave it), but until you standardize the legal stuff behind the deal, you are always going to have lawyers armed with word processors redlining things.
– Brad Feld, Foundry Group
What we need is set of standardized documents (different for each market, most likely and stage of funding) and specialized “startup lawyers”. The startup lawyers would know the standardized documents and not focus on creating yet another set of customized documents. They could charge the startups for hand-holding through the process and answer any and all questions. That would get these lawyers quicker to work with the start-up with other important legal matters such as licenses, alliances, development deals and commercial transactions.
As there are already at least five different standards for the US market alone, it’s not really a standard yet. There is a great blog entry about this subject here. Each of the examples below would require more or less legal advisor to help you.
- National Venture Capital Association (USA)
- Series Seed (USA)
- TechStars (USA)
- Y Combinator (USA)
- The Funded (USA)
It’s somewhat disappointing that there are no similar documents readily available in Europe. The problem here being of course that each country might requre its own versions of the documents. There are many organizations who standardize the documents within their own portfolio, but that’s a different thing anyway.
If you know any standardized documents for non-US markets, please let me know! Those documents should aim for the purpose described above, and be publicly available without a fee.
As crowdfunding is one of the emerging and high-potential funding opportunities for the startups, what does all this mean for these companies? And those crowd-investors who are putting their 5000€ to possibly several companies a year?
- Higher quality funding documents for small investment rounds (because creating those documents from scratch with minimal or non-existent budget is not possible)
- Better documents from the founders’ viewpoint, as it is no longer necessary to use the investor-provided as the only starting point
- Enables a crowdfunding-style financing round, where there can be 50+ investors, it would be impossible negotiate with each of them!
- Higher quality of documents as they are no longer started from scratch each time
- Higher quality of documents as the issue of big law companies using young trainees to do the work can be avoided
- More efficient use of lawyers to support the process (in case they already know the standardized documents)
- Potentially enlarges the circles of potential private investors as it becomes easier to understand the legal documents involved
- Makes it easier to invest in several companies, as there is much less variation between the different companies and legal documents
- Makes it cheaper to make relatively small investmens as there is no longer need to use one’s own lawyer each time
Summa summarum what is useful for crowdfunding is
- Creating standardized documents (for different stages of the company as well as different markets) is the starting point
- Those documents need to be acceptable for both entrepreneurs and investors
- There is a need for local lawyers who already know these documents, and are therefore able to help the start-ups cost-efficiently
- Investors becoming familiar with these documents will speed up the investment round throughput
There will be standardized documents available within the up-coming Venture Bonsai crowdfunding service for specifig stages and markets. We’d love to hear from possible partners who would like to help us to expand to other markets, and become the local legal experts as well.
Comments are welcome (of course)!
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