My Take on the Series Seed Financing DocumentsBy http://profile.typepad.com/1237764140s22740 // March 24, 2010 in Legal Docs, Seed Financings, Startups
Comparing the set with two others published for seed financings, I think the Series Seed docs look better, present better and feel better built.
And the deal terms reflected in the templates are better thought out.
Ted Wang, the principal author and curator of the set, states as a first principle that the documents "are intended to be fair, favoring neither the investors nor the entrepreneurs." And it's pleasing to see this pulled off: the suite doesn't reflect a bias to correct market norms or perceived market biases that some of the other sets do.
If there is an agenda to the Series Seed set, it may be to provide that holy grail of a simplified and relatively inexpensive set of documents for initial financing, complete with normative and sufficient deal terms, while at the same time anticipating future rounds of VC financing that will necessarily be significantly more complex. Again to quote Ted Wang, this time from his post addressed to lawyers using the set, "The documents are intended to be modular so that in future rounds additional terms can simply be layered in." (Yokum Taku, however, in what VentureHacks called his "reference-quality" comparison of the Series Seed set with other sets of seed financing documents now out there, believes that in later rounds one will need to start over with a more robust set of forms.)
Not that the set is devoid of inspiration for walking the median strip along a two-way road.
Anticipating that investors may bridle at the trimmed back rights and the pared down protective covenants, the Series Seed Investors' Rights Agreement has a novel provision, Section 1.2, titled "Additional Rights," that provides in part:
"In the event that the Company issues securities in its next equity financing after the date hereof (the “Next Financing”) which have (a) rights, preferences or privileges that are more favorable than the terms of the Shares, such as price based anti-dilution protection or (b) provides all such future investors other contractual terms such as preemptive rights or registration rights, the Company shall provide substantially equivalent rights to the Investors with respect to the Shares (with appropriate adjustment for economic terms or other contractual rights, subject to such Investor’s execution of any documents, including, if applicable, investors’ rights, co-sale, voting and other agreements, executed by the investors purchasing securities in the Next Financing (such documents referred to herein as the “Next Financing Documents”). Any Major Investor will remain a Major Investor for all purposes in the Next Financing Documents to the extent such concept exists. The Company shall pay the reasonable fees and expenses, not to exceed $5,000 in the aggregate, of one counsel for the Investors in connection with the Investors’ review, execution and delivery of the Next Financing Documents."
Pulling that off for all potential concessions to future investors may be trickier, and may (probably fairly) presuppose a standardization in terms downstream that are more predictable than those for seed financings.
I mentioned an "agenda" above, but I don't think use of the forms need be limited to startups that know they will receive VC financing in subsequent rounds. Some IT/software or web companies may not need a VC round or may bootstrap from revenue or raise supplemental funds when needed from their initial investor base. The terms of these docs are still good, and provisions like the Section 1.2 of the Investors' Rights Agreement, quoted above, will yet give those investors comfort against the unknown.