William Carleton, Counselor @ Law

Brian Rogers considers lawyering in the startup ecosystem

This morning I suggest you go over to Brian Rogers' blog, where Brian has answered the question I posed to him last week: “Is a Startup Ecosystem Without Lawyers a Good Thing or a Bad Thing?”

I'm still reflecting on how Brian divides the startup ecosystem into three segments. He may be right about that, but I want to think about it a bit more.

For that segment of the startup ecosystem in which I think Brian is suggesting he and I work most, Brian recommends that more tasks be handled by nonlawyers within a law firm. That makes sense. But isn't a law firm that can deliver services without lawyers well on the way, possibly, to being something other than a law firm?

Those are just two initial reactions. Go read Brian's post as he has thought this through. He's advancing our important discussion on the topic of document standardization and startup legal costs.

Photo: JF Sebastian / Flickr.

"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.

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.

Mobile first, web firster

Two recent articles to compare and contrast:

• Chris DeVore's masterful "The consumer app boom was loud, but the enterprise echo will be louder" post from his blog last week; and
• John Cook's interview of Sidelines founders Vinay Kuruvila, Arka Ray and Marios Assiotis in Geekwire later the same week.

Noting that native mobile apps have already moved consumers away from the web, DeVore forsees the turmoil and opportunity in store as the enterprise comes to terms with a "mobile first" world.

I especially like how DeVore explains just why different web-centric disciplines in an enterprise will need to adapt to the new mobile paradigm.

John's interview of the Sidelines founders, however, reminds us that the web is still a place for innovators to innovate - and that the web has tremendous advantages for the pure startup, just launching. Here's an entire paragraph from John's post:

'The smartest move we’ve made so far: “We see a lot of consumer startups going mobile-first with their products because mobile is an exploding platform, and there is a lot of investor interest in mobile products. However, we deliberately took the opposite approach. We launched on the web first, and this has worked out really well for us. It’s much faster to iterate on the web because there isn’t an App Store approval process, users don’t have to download the update, and we can push out new changes and experiment rapidly. Finally, user acquisition on the web is easier than on mobile where you have to rely on getting featured on the App Store or getting press. We’re going to keep adding features to our web app until the end of the year, but will release mobile apps on all major devices starting early next year.”'

Actually, DeVore makes the same points in his piece. Here he is describing the additional challenges and burdens put on product development in a mobile-first world:

"Beyond the specialized development and design skills required to ship customer-delighting software, platform and device fragmentation, lengthy app approval processes and weak (or at least nascent) user instrumentation capabilities all conspire to lengthen product development cycles and reduce the quality + quantity of intelligence that can be gathered to fuel ongoing enhancements."

Personal observation: as mobile becomes more ubiquitous, I find it easier to be productive using mobile devices, but the most empowering apps are those that synch with web services.

Photo: Ed Yourdon / Flickr.

Startup Trivia Daily is now on the web!

For those who know the mobile app, Startup Trivia Daily, which Joe Wallin and I curate through The Seattle Dudes, LLC, fun news: Startup Trivia Daily is now on the web!

This web version is Disqus-enabled, so you'll be able to leave and share comments.

Disqus seems to be rolling out products and features that connect content and discussions, and I hope that includes content and discussions across the web. Anyway, part of our bet here is that Disqus will engender more interaction with those playing the game.

Coming soon, to a web near you!

As you likely know, Joe Wallin and I, through the Seattle Dudes LLC, publish the Startup Trivia app (for iPhone and Android).

We've experienced a spike in traffic lately, and that's inspired us to do something about bringing Startup Trivia to the open web.

So we're working with our crackerjack dev firm, General UI, to see what can be done to bring the same great design to an environment that may well make it easier for fans to leave comments. Maybe we'll see discussions develop around the topics raised by the daily game question!

Our development budget is modest, so I don't want to overpromise! But we appreciate your support of the mobile app and Joe and I want to build on that interest.

Entrepreneurs, real and fake

This passage from the Isaacson biography of Steve Jobs has been quoted widely:

"I hate it when people call themselves 'entrepreneurs' when what they’re really trying to do is launch a startup and then sell or go public, so they can cash in and move on. They’re unwilling to do the work it takes to build a real company, which is the hardest work in business. That’s how you really make a contribution and add to the legacy of those who went before. You build a company that will still stand for something a generation or two from now. That’s what Walt Disney did, and Hewlett and Packard, and the people who built Intel. They created a company to last, not just to make money. That’s what I want Apple to be."

If the central point is that cashing in, as an end in itself, isn't all that admirable or ambitous, I totally get that.

But when you think of the ways startups serve an economy of innovation, isn't it a bit peculiar to insist or assume that every new venture should look to build a business that lasts for generations?

Apple, of course, has frequently extended its speed to market through acquisitions of technologies. Some of the coolest features of the iPhone were realized from innovations from startups that sold out to Apple (the acquired technologies that come to mind from the Isaacson book are the pinching and swiping features and the voice recognition function). No doubt that in many cases, Apple improved the acquired technology and otherwise further developed it so that it could be marketable; in other cases, too, the talent acquired (the original innovators) ended up taking a leadership role within Apple to teach the bigger company things it may not have learned otherwise.

When a startup is purchased in order to be shuttered - where the aim of the bigger company is to squash a competitive threat by simply taking the upstart out of the game - then I suppose the takeaway for the startup founders and investors is whatever financial gain they may have realized from the deal; but there are usually points of experience gained, too, that surely have some value for the ecosystem.

Isn't it okay for a group of founders to want to see their technologies reach a market? If the terms are right, can't it make sense to leverage the resources or market share of a bigger company, thus mitigating the financing and execution risks of building their own Apple?

Rhetorical questions, I know, but Jobs's statement is making me think that part of building a "real" company may also include the willingness to become part of another company already on its way at a quicker pace or with greater inertia.

Photo: Michael Fleming / Flickr.

The Transcript: What Will the JOBS Act Mean for US Startups?

Yesterday's live chat on the Wall Street Journal, "What Will the JOBS Act Mean for U.S. Start-Ups," flew by quickly, but left a transcript in its wake.

The questions were fantastic. People are obviously reading and thinking about the the JOBS Act and what it means.

Among other points, we discussed the individual investment limits under the crowdfunding exemption, including the responsibility of funding portals to police the individual limits; the "daylight" afforded the SEC to make changes to current practices around verifying who is and is not an accredited investor, for purposes of Reg D Rule 506 offerings; and even differences between the crowdfunding exemption and the reformed Reg A, in terms of transferability of the purchased shares. All "inside baseball" stuff.

I tried to lend my sense of how the JOBS Act was cobbled together, as well. That's reflected a bit in certain answers that were tweeted, as pictured here.

I see Eric Cantor's press office tweeted notice of the event.

I want to thank Angus Loten for moderating and Allison Lichter for producing. They got me trained on the system, called ScribbleLive, that the WSJ uses, and coached me through the event.

Props to Mr. Bay, his typing class I took in 8th grade, and the manual Underwood on which I learned to type. Can't think of any training that has been more useful for digital life in the early 21st Century.