A decade ago, a company would need to raise a couple of million of dollars to create a new product and effectively bring it to market. Today that amount is dramatically smaller. The advent of cloud computing, open source software, platforms with APIs, and numerous other changes have lowered the cost of launching a new enterprise. For this reason, startup companies are now raising significantly less capital – and many investors have begun to focus efforts on this smaller early stage investment – which typically ranges from $500,000 to $1.5 million.
Yet amidst all these other dramatic changes, one aspect of startup life has not changed at all: the legal documents used for financing these transactions. A typical venture capital investment package consists of five documents: two certificates, a legal opinion and two consents, and is roughly 100 pages long (excluding signature pages). These documents provide for a range of rights, preferences and privileges, some of which are vitally important to protect the investment from the outset and others of which do not become important until after the company has gone public. This level of investment in financing documentation made sense when the investments were $3 million to $5 million, but for these smaller seed stage rounds, it’s simply overkill.
The Series Seed Documents have been created to address these issues. They are considerably shorter and simpler than the status quo investment documents, designed to keep the most essential terms for the transaction and postpone the other terms for a later fundraising round where such an investment would be warranted. A more detailed description of the content of these documents and rationale behind them can be found here.
The Series Seed Documents should reduce both the time and cost of a financing transaction. It should go without saying, but time and money are the two things most vital to a young company.
From an investor’s perspective, while moving away from the traditional full-blown financing documents entails giving up a number of rights and protections, when taken across numerous transactions, the benefits of spending less time and money on the documents outweigh the cost of sacrificing these additional rights and protections. Moreover, I don’t believe there’s anything included (or excluded) in these documents that will be wildly controversial. Based on discussions with numerous practitioners, I believe these documents largely represent a consensus as to what should be in seed round documents. Additionally, I plan to “open source” the documents so that they can be continually improved by suggestions from the community.