Fred Wilson throws down the gauntlet – and goodcounsel picks it up and runs off with it

I love Fred Wilson’s blog. Sure, he’s a smart VC, but he also writes well and believes in sharing his knowledge. I always learn something from his posts.

A little more than a year ago, Fred issued a challenge to startup lawyers: to keep legal fees down for startup investment transactions. Way down. In his view, when an entrepreneur sets up and raises $500K to $1MM, legal fees should be $5,000 or less. I completely agree with that. The fifteen or twenty thousand dollars that companies are paying for stuff like this? It’s nuts.

I represent many early stage companies, and I have done several convertible note funding rounds for well less than $5,000 — and that included services agreements and other extra services to boot.

I’ll take it one step further. There are a lot of founders just getting going, and are several months to a year out from needing or getting any funding. But they still should get an entity formed to do some of the basic things necessary to protect themselves individually, document the business deal among the founders, and ensure that the key company intellectual property has a secure home. They need a very basic set of documents to achieve this. It should not cost $5,000. It probably shouldn’t cost half of that.

It seems as if this should be easy, but it’s not. On the one hand, the law firm cost structure is far too high to set things up for entrepreneurs cost-effectively. (Let’s put aside the here-today gone-tomorrow fad of law firms doing “free” legal work or deferring fees for startups.) Not only do firms need to charge too much; their document sets are overkill for startups. A startup does not need — should not have — a 45-page LLC agreement. Many lawyers don’t even understand everything in a document that big; the founders don’t stand a chance.

How about, at the other end of the spectrum, the industrial producers of legal documents like LegalZoom? Economic theory tells us that mass production allows for economies of scale. Yes — and what is produced is a commodity. It can only vary so much. (Do you want that LLC Agreement in a narrow or a wide?) This works pretty well for cookie-cutter documents such as simple wills. But mass document manufacturers do not address founder vesting issues or startup transfer restrictions. I recently saw a document from one of these websites, which granted the members of the LLC with unlimited rights to transfer their ownership. So when your co-founder burns out and transfers his fifty percent ownership to his cousin Herb, don’t come running to me. Go complain to LegalZoom.

What is needed is something between these two extremes: a smart, credentialed lawyer with experience helping entrepreneurs (better: who has been an entrepreneur), low overhead, and strong opinions about clear legal writing and transparent fees. Funny, I know an lawyer like that!

In the next couple of weeks, I will be completing my 0.9 version of a set of ultra-lean, cost-effective kickoff documents for startups. These are the product of obsessive thinking and many false starts. I’ve set a couple of ambitious goals for this project:

• a flat fee of no more than $2,000 for the docs, with a small helping of advice on the side
• No more than 10 pages in total (!)
• Simple enough for an intelligent founder to understand

Achieving these goals involves hard decisions about what not to include. Well, not always so hard. Gone will be a lot of provisions unnecessary in early-stage deals. (Goodbye drag-along and tag-along rights; if you’re good and lucky enough to make it to Series A or B, we’ll do a revised set of documents, and you’ll be in a position to spend a little more.) The standard three pages of partnership tax mumbo-jumbo that weighs down most LLC agreements? Gone. (If one of the founders wants to contribute appreciated real estate to the business, we’ll figure something out — after we finish looking at the flying pigs.)

Founders, talk to me: Does this sound exciting? Appealing? What are the must-haves and can-live-withouts?

Categorised as: Lawyering, Startup Stuff