Standardizing Financing Docs - Feld's & Mendelson's Take in "Venture Deals"

Brad Feld and Jason Mendelson have an interesting take on the standardization of legal documents used in angel and venture financing. It's found in the early chapters of their book, "Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist."

Their perspective is that the much wished for, much sought-after standardization of startup financing documents has already happened.

That's if you discount the term sheet; they acknowledge that overt efforts to standardize term sheets have failed. But the complicated agreements that follow a signed term sheet? Different story:

"Ironically, the actual definitive documents have become more standard over time. Whether it is the Internet age that has spread information across the ecosystem or clients growing tired of paying legal bills, there are more similarities in the documents today than ever before."

They further observe that legal fees have settled into a predictable range. Moreover, they point out, if you take a long term perspective, legal fees have come down.

"As of this writing in 2011, a very early stage financing can be done for between $5,000 and $15,000 and a typical financing can be completed for between $25,000 and $40,000. . . . 

In case you are curious, these numbers are virtually unchanged from a decade ago while billable rates have more than doubled in the same time. What this means is that document standardization is a reality, but it also means that the average lawyer spends less time per deal than in ancient times (the 1990s)."

The $5,000 to $15,000 range for financing is in line with the thinking I've written about previously. As readers of this blog know, and as best discussed in this guest post on GeekWire, I struggle with Fred Wilson's $5,000 seed financing legal fees challenge, because very often there is substantial "cleanup" work that must be done before the startup can close on an outside investment. ("Cleanup" is often a euphemism for getting inventions assignments completed, founders stock issued, or finally getting around to other fundamental organizational matters that weren't addressed at incorporation).

But Feld and Mendelson have a better way of framing the tension by simply saying that their range speaks to work around the financing as a discrete transaction. It will take more money if there is a cleanup to do:

"[I]f your company has any items to clean up from your past, your costs will increase."

By the way, I'm only a few chapters into the book. So far it's really good. It's not only talking turkey, it's expressing the spirit of the times in a place called startup land.


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