VCs & Tech Lawyers: INNOVATE, AUTOMATE, SIMPLIFY

i'll have a lot more to say about this in the future, but at the moment i just want to observe that for a group of folks who hang around startups & talk about technology & innovation all day long, most VCs & lawyers i know really need to eat some of their own [startup's] dogfood.

Over the past 3-4 months, i've made a few small investments in several startups and become an advisor to a few others.  The amount of paper, email, & faxes i have exchanged to get these deals done is FUCKING MIND-BOGGLING.  Aren't we in the 21st century?  Don't we all use the web & online transactions for everything?  Aren't you supposed to be ADVISORS to startups that make lives simpler & use the INTARWEB to get rid of all the paper, delay, & complexity we HATE LIKE THE PLAGUE?!?  Or did you all grow up with Ted Stevens or something?

Seriously.  If you guys REALLY WANT to be in the business of providing money & legal advice to startups, THEN GET WITH THE GODDAMN PROGRAM. 

Innovate.  Automate.  Simplify.

This means:

1) NO MORE FUCKING FAXES.  get used to web forms, and put all your term sheets, advisory agreements, and other documents online.  it's not that damn hard.  furthermore, when you close a financing, don't send me a pound and half of published paper.  it's a waste of everyone's time & money.  worst case, send me a CD with everything scanned online.  best case, send me an email link to an online doc.  if you must, require me to SIGN ONE DAMN PAGE and let me fax that solitary page, not 30 pages back to you.  i sort of understand why lawyers do this, since they charge by the hour.  however, i have no fucking clue why VCs do this, since it probably makes their lives hell just as much as it does entrepreneurs & angels.  if there is a rational reason you guys tolerate this, please explain it to me.  it's certainly no problem for my bank to do a wire transfer of $25,000, so why do you think your paper is somehow any more important / less secure than cold hard cash?

2) SIMPLIFY THE TERM SHEET.  stop using legalese & complex documents as a weapon / negotiating advantage.  if you must include participating preferred / liquidation preferences, include a simple graph that illustrates what's going on (see Leo Dirac's excellent visual explanations of liquidation preferences below).  VCs do deals 10+ times a year, and lawyers do them 20-50+ times a year. However, entrepreneurs do them only once every 2-5 years.  Guess who gets screwed on the complexity?  So if you continue to use complex term sheets, please at least acknowledge to the entrepreneurs you're funding or providing legal services to that you're intentionally screwing them over with complexity in order to gain a negotiating advantage. If the SEC can require plain english language disclosures for IPOs & other advanced financial documents, you guys sure as hell can as well.  imho, smart VCs & lawyers will realize that simple, clean term sheets will soon become a negotiating advantage IN THE OTHER DIRECTION, and entrepreneurs who have a fucking clue will simply not stand for this shit.  as an angel investor, i will encourage all my startups to ask for simpler term sheets, and i'll send my dealflow to VCs & lawyers who play ball with me.  i'll also spread the word about those who don't play ball.  believe me, i'll get the word out.  you'll become known for being a Tech Luddite.

3) STANDARDIZE & AUTOMATE.  everything that you do, from creating advisory agreements to employee stock option plans, should be standardized & moved online .  it should not require paper, nor even email moving back & forth to make this happen.  you should have an online repository of standard web forms & agreements, and the ability to customize these quickly for your clients with a few simple changes, ideally driven by a wizard-based interface that is self-service.  lawyers should NOT charge hourly for these services, rather they should provide a flat-rate package of services that encompass most of the regular items, and perhaps charge hourly / extra for additional or unusual items.  i know for a fact that immigration lawyers have FAR more variation & complexity filing work visas & green cards, and yet for many of their services they charge a flat rate.

in short, you guys are still in the 80's.

you've hardly innovated or automated ANY of your business models in decades (and kudos to the few like DFJ, CRV, First Round, Y-Combinator, TechStars, & a few others who have tried some unique variations, at least you guys are moving in the right direction).  with the minimal exception of using email, you CERTAINLY have not taken advantage of technology to improve productivity, reduce cost for customers, or simplify and present information in ways that help move the industry forward.

in fact, your CONTINUED tolerance & proactive [ab]use of current business models & practices should serve as clear evidence to your customers that you really don't give a damn.  and as with other businesses where incumbents refuse to innovate & rest on laurels, and continue to screw customers with outdated technology & poor service, you're exactly what Schumpeter spoke of.

and you rightly deserve to be disrupted and destroyed.

So you are now on notice.

Every time i talk to one of you from now on, i'm going to ask you what you're doing to move the industry forward.  What are you doing to innovate. to automate. to simplify.  What. Are. You. DOING?

Lead, follow, or get out of the goddamn way.

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UPDATE: Oren Michels reminds me that Ted Wang is one attorney who is innovating.  His VentureBeat article "Reinventing the Series A" is a great step in the right direction.  Ted is super smart, and he rocks.  I'll also mention that White & Lee have done some good work to help educate entrepreneurs over the years (a firm i've used on several occasions).

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UPDATE2: Should have of course mentioned the fbFUND that was announced last week, and the folks involved there (Accel, Founders Fund, Reid Hoffman, Josh Kopelman, Rajeev Motwani).  definitely innovative, altho not sure who was the driver on that one.

Comments

[Dave]

>>The Internet is for poor people

@Otakucode: thanks for the "enlightenment", and i completely agree.

... and just to be clear, it is my LIFE'S FUCKING MISSION to put people such as you describe to an early grave, and create revolution as required to REMOVE THEM FROM POWER well before they term-out or expire.

*** By Any Means Necessary. ***

- dmc

[otakucode]

Well, you're not going to be hearing from any of the guys with a lot of money, so let me bring down their "wisdom" from the mountain for you: The Internet is for poor people. The Internet doesn't have a barrier to entry, and anyone can get on it. That means those whose lives are based around exclusivity (did I mention I had breakfast with the CEO of MegaCorpSoft last Tuesday?) have no interest in it.

An executive, a "real" one (tech company execs are looked down upon as nouveau riche and working in an industry akin to prostitution or theater, churning out entertainment to keep the rabble quiet) sees the Internet no different from a teeming public market, with grubby people packed in shoulder-to-shoulder. They prefer private schools, good breeding, and associating with people in the same tax bracket. And they decide how business is conducted.

Their secretaries send email, they don't. Their assistants buy things off of Amazon, they've never touched it and wouldn't think of it any sooner than they would run to Walmart to get a screwdriver so they could repair something they own.

The two major groups that control the technical details of how businesses are put together (what one has to do before a corporation can be said to exist, etc) are these guys and legislators. Legislators are, mostly, the same. You won't bump into a legislator at the mall, or find yourself sitting next to an oil company executive at McDonalds, and you won't bump into them on your blog either.

[T.A. McCann]

I have had these emotions so many time as well. Thanks for the post Dave.

In my experience, most lawyers talk a good game about "adding real value" but just don't. They take their cut, even before the VC's.

I think there is a huge opportunity for some firm to reinvent the business, make it all online and simplified to bare bones. I am sure many of the web2.0 companies would use them and that could be a tidy little business.

I am new to the blog, but keep it up. Good luck at the conference this weekend.

T.A. McCann

[Jason M. Lemkin]

Just try EchoSign. You can get an electronic signature for free in about 60 seconds, even sign on your Blackberry. http://www.echosign.com.

Copies of all signed documents will also be stored in your EchoSign account if you want them there. You can also automate fax signing as well.

[Amit C]

The other side of this story is their companies get the same lawyers.
One actual example is KPCB, their startups have atrocious agreements, even from an engineer's point of view.
I interviewed with one in Seattle, early 2007 for a sw dev opening. They started by asking me to sign a 3 year non-solicit agreement buried in page 3 just to interview. I refused and then they changed the terms.

Another one earlier (2001, now gone) had too strict employment contract.

Ugh, I avoid the KPCB funded startups, though it is one of the top VC firm unless it is a killer startup.

Amit

[Yaron Reich]

Great piece !

I totally agree with you on over exaggerating fees, time and complexity of round A deals.
Round A should be the simplest round since the land is practically virgin.
The lawyers just need to put the right legal infrastructure for a great company and you can have almost standard form and documents for this.

Nonetheless, I believe that much of the blame lies with us – the entrepreneurs !

I can give you two ideas of how I believe we can get out of this predicament:
1. simply shop around; an entrepreneur need to meet with 2 – 4 leading legal firm and let them bid on the overall rates and services they will charge for the round A. meet with them, talk to them, explain to them about your company and dream and make them believe in you. Once you did so they would like to stay with your company for the long run. Be sure to tell them that you also have other offers and you will choose the most attractive one.
When they know that they are in competition they can shave up to 30% of their regular rate and in order to keep you as their client they will need to do good job e.g. they will need to get efficient.

2. For the second idea I would throw you the glove to pick up; if we will have a site that will gather information on leading legal consulting who are specialize in round A for various fields we can then rate them according to their professional level and pricing level. Once entrepreneurs, VC and legal consultant will be aware of common price for round A you will see how prices will go down and in order to keep profitable they will need to get efficient.

[Shane]

What an interesting way to put forward a very important point!!

[Michael Kreppein]

Great post! I'm a co-founder of a software startup and we are still in the friends-family seed round of funding. I'd like to see a simple-to-read promissory note that converts upon Series A. Does anyone else have this need? Will anyone one share one? Thanks!
msk at inquisix dot com

[Dave]

thanks for the note Furqan.

actually, i believe that Plain Language English the SEC mandates for IPO filings and 10-K documents is very precise, and not "lossy" as per common english vernacular as you suggest.

note: i'm not suggesting we kill precise legal language, just that we make it as simple as possible -- and no simpler.

in addition, having a visual representation (as per Leo's examples) that exactly syncs with the verbal description would probably go a long way to increasing understanding.

legal language need be no less precise, just less complex.

[Furqan Nazeeri]

I wholeheartedly agree with your points #1 and #3, but not #2. I think "legalese" is required because common English is imprecise in the same way that programmers use "techese" or accountants use GAAP. If you're a founder/CEO it's just another thing you have to learn in order to do your job. I don't feel sorry for an entrepreneur who didn't take the time to learn how a termsheet affected his business. That said, there is way too little "reusable code" in the legal world and too much paper for my taste.

[Jay Parkhill]

I would love to have a "virtual closing room" on my website where people could log in and digitally sign documents.

I spend so much time chasing signatures and telling people to find fax machines- this would be fantastic.

Is there anyone willing to educate me in how to do this? Thanks

[Stephen Kellett]

Seriously funny and right on target!

A few years back we hired some patent attorneys to do some work. £200/hour (thats $400/hour!). I was amazed when I finally twigged why email communication with them was so odd - it always seemed to come from a secretary. The patent attorney was dictating (yes, you read that right) his email and the secretary would then type it up and send it later that day. Un-****ing beleivable.

And I was wondering where that £200/hour was going. Talk about back in the 60s with a secretarial pool staff.

Stephen

[Anthony Kuhn]

Dave:

When you go off, you go OFF! I can remember working at Bloomberg News in the Washington D.C. bureau and right from the start we were required to use the exact software our customers used in keeping with the "eat your own dogfood" motto. Good times ensued as anytime a modification was needed for a customer, which was basically daily, the software would be rolled out overnight, much to the chargrin of the 4 am reporters who suddenly couldn't file breaking news on their broken systems. I lasted 2 years as an IT support dud(e) before tossing in the towel. Your post is on topic for some of my audience, so I cross-posted on your piece, along with some comments of my own, at http://blog.innovators-network.org The Innovators Network is a non-profit dedicated to bringing technology to startups, small businesses, non-profits, venture capitalists and intellectual property experts. Please visit us and help grown our community!

Best wishes for continued success,

Anthony Kuhn
Innovators Network

[Ask Bjørn Hansen]

Hear hear!

It's not just VCs - it's all sorts of lawyering. When I do consulting work I'll often get a 5+ page contract. WTF? How complicated can this be? Fortunately I've been doing it for long enough that I can send them my PDF back and ask we use my much simpler contract; but even talking about it is such a waste of time.

The contract should just be: "You show me stuff. I promise not to tell anyone else. I'll give you ideas for how you can do it better; I might promise to competently give you useful advice. It will take 3 days, you pay me $4500."

- ask

[loren nason]

since i have not had any dealings with the VC industry I am surprised about how behind they are on the technology curve.

With Lawyers I am not surprised at all. As much as they bill per hour the ones I have dealt with are also behind the tech curve and have no desire to move forward.

Real Estate seems to be the worst over all on technology acceptance. I can't even count how many times I have been told that e-signatures are too difficult to learn.

[pwb]

This might help a little. DocuSign:
http://www.techcrunch.com/2007/09/24/docusign-raises-124-million/

[Steve Kane]

One painful item you didn't cover:

Why the heck are startups expected to pay for the closing and due diligence costs of VC fundings?

VCs collect huge "management fees" -- usually 2% of COMMITTED capital (not drawn down capital) -- isn't this what those fees are supposed to pay for? For the overheads and costs associated with sourcing funding deals?

Instead the startups are expected to pay for the VCs lawyers, etc. Sort of like being required to pay for the billyclub used to beat you up? I mean, what incentives do attorneys have for keeping things simple and quick and cheap when their clients -- the VCs -- dont care how much they bill out?

If the VCs insist on your company paying their closing costs, then insist back on a "cap" - a maximum amount the startup will pay. Say, $10K total, across all VCs and VC lawyers in the deal. Then sit back and watch how quickly and cheaply closings can get done!

[kareem]

Well fucking said, Dave!

[pwb]

It'll be interesting to see if off-shoring legal services ever takes hold.

[Michael Lamb]

hahaha, McClure this is the best post I've ever read from you. One start-up I'm involved with got a $250K investment - chump change eh? The documentation they produced from this transaction was as thick as a (big) yellow pages book! It was unbelievable.

I think lawyers and politicians are in cahoots to keep law firms in them thare fancy buildings....

[Dave]

>>One thing to keep in mind, though, is that we don't make the laws

mmm... have to disagree with you there. (and believe me i know *you* are more part of the solution than the problem)

certainly, lawyers can be some of the most important folks involved in CHANGING the laws. however, i just don't think most lawyers perceive that to be in their best interest.

at least on behalf of their clients, if not themselves, i think they should be more motivated to get those laws changed & have them make more sense.

those that take the lead (such as yourself) will certainly earn our respect, praise, and business.

[Ted Wang]

Dave-

Absolutely agree with the sentiment and we really are working on trying to make things simple. One thing to keep in mind, though, is that we don't make the laws. So, for example, the California Secretary of State would not accept FAX SIGNATURE PAGES until about a year ago. That's right, if you didn't have "blue ink" your Articles of Incorporation would get bounced right out of the Secretary's office.

I do agree that we should try and move towards more standard forms. One other tricky thing to deal with is the laws keep changing. So, for example, the new tax law Section 409A has made us fundamentally rethink how to handle options.

Over all, our form documents are a lot like software code. Enterprise software customers buy both the big applicaitons and customization/implementation services. The value is not just in the code itself, but it is in getting the code to peform the tasks that are specfic to the enterprise. Similarly, the value of buying transaction services from a law firm is not in the forms themselves, it's in having the knowledge as to how to change them and the judgement as to when. (Btw: Apologies to Lawrence Lessig who has made this analogy in more meaningful contexts)

I do agree that we lawyers should adapt our business model to the extent possible to charge for the knowledge and judgement and less for the form documents. Adapting some easier signing technologies would be a good step.

[Edward Vielmetti]

see EchoSign

http://www.echosign.com/

it's also integrated into Salesforce.

[pwb]

Violent agreement. Adobe could help out here by making its PDF-based products more affordable and accessible.

[Oren Michels]

Oh, and at least one part - the fax - can go away. When I helped get Feedster's series A closed over two years ago, we had two investors who did electronic sigs - literally, they opened the signature pages as word docs and pasted in an image of their signature in the appropriate places, saved it, and emailed it to me. Christopher Austin, our attorney, assured me that it was perfectly legal. I had others do the same thing for Mashery's funding as well.

[daveschappell]

I couldn't agree more, Dave -- especially since I'm probably one of the folks who sent you several pounds of paper. We literally have to make the trade-off between having our attorney's coordinate the paperpile and costing us a ton of money or doing it ourselves with the requisite time and potential error possibilities. For our last round of docs, we did it ourselves, and I literally felt like I was at my first job out of college copying, stapling, adding post-its (for the 19 places people had to sign), etc. I can't believe solutions haven't already appeared with online signatures, document storage, delivery and acceptance confirmations, and more.

Onward...

[Oren Michels]

Couldn't agree more. Ted Wang at Fenwick is trying to make some progress on this, cutting the required docs from 5 down to 3 and getting rid of silly things like registration rights that will never ever ever be invoked on a series A deal. It's a baby step, but significant enough that when I had lunch with Ted last week I suggested he put the docs out in a way that they'll be easy to use; it will likely raise his profile in a very good way in our world.

Ted did a great post on this as a guest contributor on Venture Beat the other day