"Why does the cost of basic legal documents need to be zero, even for startups?"

Yesterday, a good and loyal friend of this community, Brian Rogers, left the following comment on an older post:

"Bill: I revisited this piece because I've been thinking about your discussion with Ken [Adams] about whether the benefit of contract standards lies in increasing quality vs. increasing transaction efficiency/lowering costs. Commoditizing contract drafting should drive down costs significantly, whether your aim is lowering costs or increasing efficiency.

"But why does the cost of basic legal documents need to be zero, even for startups?"

I want to give Brian a straight answer. The answer won't be "fully baked," but it will be a start, something we can build on through discussion.

Free air

A straight answer, an initial answer, in the form of a hypothesis:

The cost of basic legal documents needs to be zero especially for startups, and indeed perhaps only for startups.

Now, for contrast, let's characterize a situation where the legal documents are going to be expensive to prepare. Every time.

If I think of a business - new, emerging or well-established - that is being sold, I can imagine all sorts of permutations on the structure of the transaction. To some extent, the structure will be driven by the experience, expectations and habits of the buyer. To a lesser extent, typically, the seller's prior experience in selling a business will inform the choices made. But to a far greater degree, structural choices will depend upon the nature of the respective businesses of the buyer and seller; that, and the goals that each of them want to realize with the transaction.

So the deal could be a stock sale, merger, or asset transaction. The shareholders could stand behind all of the representations of the company, or indemnify the buyer only up to a cap. The price paid could be cash, stock, or something else, or a combination of any of the three. The tax consequences to all parties will be thought through.

The lawyers involved will all have their favorite, familiar templates, but no M&A deal - big, middling or small - will be the same. Every deal will be unique, every definitive agreement will be bespoke.

Back now to basic legal documents for startups. And I'm going to make one fundamental assumption: that the founders want the startup to be structured to facilitate financing by investors as yet unknown to them. Players to be named later, if you will.

In this situation, the entrepreneurs do not want the relevant legal documents - charter, bylaws, stock subscriptions, assignments of invention - to be unique or to feel customized. They want them to read like everyone else's.

They want their business, or their approach, or their team, to stand out. Their legal docs need only pass muster. What's different about the startup's business or approach or team will attract the appropriate investors. Legal documents that are different or outside the norm can only attract the kind of attention that may turn some investors off.

As I think through how to answer Brian's question, it becomes very clear to me that the tech startup industry is already a kind of ecosystem of efficiency.

Close your ears now unless you are a lawyer, because I'm going to say something that may strike you as an indication of jealousy over professional prerogative: lawyers need to participate in that ecosystem of deficiency; if they do not, entrepreneurs and the ecosystem will find ways to bypass them. (Question for Brian: is a startup ecosystem without lawyers a good thing or a bad thing?)

Photo: Mark Sardella / Flickr.


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