Beginning later today, entrepreneurs on the verge of raising seed-stage funding will be able to access open-source, stripped-down term sheets called Series Seed Documents.
The documents — authored by Fenwick & West attorney Ted Wang with input from Andreeesen Horowitz, First Round Capital, True Ventures, Charles River Ventures, Ron Conway, Mike Maples, and several other heavy-hitting seed investors — are designed to make entrepreneurs’ first, small financing event as fast, efficient and cost-effective as possible.
Andreessen tells me that the group wanted to produce an alternative to the gratuitously complex term sheets that are typically offered by venture capital firms, and that cost entrepreneurs who need to muddle through them too much in legal fees. (If the move happens to make most other venture firms look like financial bullies, well, maybe that’s okay, too.)
We spoke Monday morning about the impetus behind the documents.
peHUB: Why are these new templates necessary?
Andreessen: When venture capital was created, a company’s first round was typically between $5 million and $20 million because it was hard to get a tech product built. Now, the cost to get a first product built has dropped dramatically because of cloud computing and all these other factors, so between $500,000 and $1 million is often enough.
What hasn’t changed is the process by which funding rounds get done. So what’s been happening is entrepreneurs have been finding that if they raise money from angels, that’s fine, but VCs will often try to use their full standard processes, even for small rounds. That can mean a lot of legal negotiations and legal fees, because [standard term sheets] are really complicated. Historically, that’s worked to VCs’ advantage, but it’s not good for entrepreneurs.
Because these open-source documents are transparent and standard, any angel or VC or entrepreneur can pick them up without having anything complicated or mysterious happen. They’ll cost [everyone] far less in legal fees, too.
But in your view, it’s really just the VCs who are the problem. You aren’t trying to tacitly address anyone else out there. Is that right?
When VCs do $10 million rounds, the whole process will continue [as it exists now], but when VCs are in angel rounds, they should act like angels and not like VCs. That’s how we want to act [at Andreessen Horowitz]. We don’t impose certain terms or conditions or do anything that Ron Conway wouldn’t do, and we’d encourage our terms in the venture world, or something similar to them.
Practically speaking, can you really expect a VC with ties to another law firm [other than Fenwick & West] to use what you’ve all put together? How will they explain this new term sheet when they present it to their attorneys at, say, Wilson Sonsini?
It’s like open source software. If it’s developed by IBM, there’s no reason for another company not to use it. The documents aren’t owned or controlled by Fenwick. Fenwick isn’t getting paid for them. I don’t think there’s a reason for another attorney not to use them, except if they’re concerned over reduced billings. Lawyers have a financial incentive to make things more complicated because they are paid more.
I am not defending attorneys’ fees, but attorneys help startups make judgment calls and give them valuable advice. I think some would argue that a template isn’t going to do that for an entrepreneur.
I don’t think that stuff is affected. High-quality attorneys aren’t in business to make money on seed-stage financing and I think they’ll use them because they’re a value [for their clients]. Right now, because terms sheets are so complex, it’s not atypical for a round to run an entrepreneur between $15,000 and $100,000 in legal fees. That’s a lot of money if you’re talking about a $500,000 round.
As we speak, the templates aren’t yet available online. Can you tell me more specifically how they reduce the complexity of traditional term sheets?
Typical documents involve page after page of details. They try to anticipate whether, if the company goes public, investors have the ability to register and sell their stock. They address what happens if there’s a down round and how subsequent rounds are treated. They include materials on dividends treatments, which, of course, startups never pay out.
Basically, what these new documents do is to defer all these issues. The investors in the [seed] round get all the rights that the investors in the next round will get, but the next round will actually involve the serious amount of money, right? There is never a down-round for a seed-stage company. If a year later, when it comes time to raise serious money, you’re investing at a lower valuation, that company [probably shouldn’t be around anymore]. So none of that needs to be dealt with up front.
Thefunded has also produced seed-stage templates, and I think Brad Feld of Foundry Group has, too. Did you ever look at them? What’s the difference, and why are you getting behind this initiative instead?
We have looked at them. I know Ted [Wang] did detailed analysis of all the pros and cons. I’ve personally forgotten the differences. But we don’t view this as competitive. We view it as one set of initiatives. Any project with the same goal is something we’d agree to in a deal.
Last question: You announced your $300 million fund last July. How much of it have you committed at this point? Five percent? 10 percent?
Hmm. I don’t think we’re talking about that, but let me check with my partner and get back to you.
Update: Docs available here.