Despite the valiant attempt of Sarah Reed (at the time general counsel at Charles River Ventures and now a partner at Lowenstein Sandler) and the rest of the NVCA committee (of which I was a part of) on model legal documents, I got many comments that the NVCA model documents “don’t work.” I think this is b.s. given that every firm I know was involved in the drafting, but let’s assume too many cooks can ruin a kitchen. In the responses I received, I heard these documents were too east coast-biased, too west coast-biased and too VC-biased. While I suspect much of the blow back is based more on ego issues than the quality of the documents (which I happen to think are great – good job Sarah and team), I’d like to suggest the following alternate approach.
Let’s take two lawyers from each of the few most active Silicon Valley firms and most active east-coast firms and put them in a room. One lawyer from each firm represents “the VC” the others represent “the company” to work together to come up with a reasonable set of deal documents, including all but a small amount of “business terms” that I’ll discuss below. Then everyone pledges to use these form documents in all deals against each other, UNLESS the client want to truly go “old school” and pay for complete negotiations for all the documents. Since everyone will know about these standard documents, the costs for opting out will be both financial and reputational. To pick one simple example, can we just agree to one demand registration rights and two S-3 rights? We all know that other than the procedures for piggyback rights, these provisions are simply not controversial.
I pledge that if the firms do this, I’ll accept whatever deal they come to and never ask for documents outside of this. Knowing many other venture folks in similar shoes as mine, I’m fairly certain that they’d like this approach. I’ve been involved with many hundreds of financings with the “usual suspects” and the documents always end up being one degree of separation from each other. I just don’t care about terms that much, as these documents don’t drive my returns.
I think 60-80% of my deals would immediately be covered by these documents even if no other firms adopted them. This alone should cut down costs dramatically. I have one piece of data that I think supports my conclusion: I’ve noticed material efficiencies on deals when Cooley Godward Kronish is on one side of the deal and Gunderson Dettmer is on the other. Both firms clearly have tons of experience as do other firms, but perhaps it’s the commonality of the “Benton / Gunderson book on financings” that tie these firms together, but there seems to be real efficiencies in the way deals get done when these two firms work together.
Furthermore, I pledge that if the firms do this, I’ll cut down my standard form of term sheet to one page. It will have price, preferences, board structure and a couple of other items not included in the standard documents. I’ll no longer have to negotiate registration rights, anti-dilution carve outs and standard protective provisions.
Adoption of these documents is the key. How best to do in light of the NVCA experience? First, the firms that negotiate them will need to be leaders in using them, promoting them and explaining to their clients the benefits of using them. Simply put – market the hell out of them. Next, other law firms will have the choice of either adopting them as well, or try to explain to their clients why the documents drafted by these leading firms “aren’t good” and / or the client should pay extra fees for custom documents. Lastly, VCs and companies will need to adopt them and mandate their usage.
While we are at it, maybe the lawyers can agree on standard forms of company formation documents (and yes, you’ll have to agree on whether or not transfer restrictions are in bylaws or option agreements). If you do this, perhaps you can go to fixed fee pricing for incorporation activities, as some firms are doing. The firm would send out a client questionnaire with all the pertinent questions and the documents would be modified accordingly. I realize that reality that some entrepreneurs are more sophisticated and experienced than others, so there will be some variability, but this should be a much better starting point.
Next, massively scale down legal opinions except for capitalization, due authorization, and litigation representations. Maybe they go away altogether, as they have in some M&A deals, but in any event, they need to be radically changed. (I can’t take credit for this idea. Eric Jensen at Cooley Godward Kronish recently suggested it). Not only will this speed up the process, but maybe law firms can spend less on malpractice insurance. In fact, I’ve never heard of any VC actually suing on an opinion, so maybe the punishment for screwing one up is “fixing” the problem for free, not uncapped liability that one always hears law firms talk about. In a comment to my original post, Jeremy Glaser, from Mintz Levin stated that much of the legal costs go into the non-contravention / no conflicts piece of the opinion. His idea that we should kill this particular opinion doesn’t strike me as a bad idea. If VCs want it, they can agree to pay for it and that is fine. One unnamed partner at a large Silicon Valley firm wrote me a series of very thoughtful emails regarding the need of no conflict opinions (and actually changed my mind on the importance of them), but also was quick to point out that we should tailor the analysis to a known universe of documents and be flexible to change the requirements depending on what series financing we are involved in and not force the same opinion to be given every time.
Lastly, make the diligence process easier. Create online data sites that contain all the relevant corporate documents. Allow your clients to post other documents to the site. Stop sending paper copies and spending time gathering documents. While the firms are agreeing to standard forms of deal documents, agree to a standard due diligence checklist. I promise that I’ll push my companies to use the portal and not waste lawyer time and money collecting documents.
So there you have it – Law Firm 2.0 on controlling financing deal costs. The big question is whether any law firms will take the leadership initiative to put aside ego and old ways of doing business to really move the ball on efficiencies and costs. Next topics: law firm billing practices, re-architecting the law firm and a lawyer “bill of rights.”