Companies that have private investment documents drafted prior to passage of Dodd-Frank in 2010 should be very careful before reusing these documents. Section 513 of Dodd-Frank brought about an important change to the definition of “accredited investor” set out in the Regulation D exemptions to registration under the Securities Act of 1933.
The $1,000,000 net worth standard in Section 501 of Regulation D now excludes the value of the investor’s primary residence. (Sadly, in view of the housing market’s performance over the last few years, this change means less than it might.)
When it comes to fundraising, securities laws are always implicated. It’s always a good idea to have your lawyer review your documents, even if you think you have a well honed set from the prior round.
The good news is that with GoodCounsel, this legal review does not have to break the bank.
In order to take their companies to the next level, many company founders will seek money from individual investors. Before doing this, it’s important to know the basics of the regulatory framework enforced by the Securities and Exchange Commission. Running afoul of the law here can have serious negative consequences. Conversely, knowing what you are doing allows you to take advantage of “safe harbors” written into the rules by the SEC in order to provide clarity and certainty in this process.
There seems to be a lot of discussion among VC’s and lawyers on the coasts about the proper legal vehicle for seed-stage deals (e.g., here, here and here) and ways to streamline the legal documents (and thereby to minimize the legal fees) . As the founder of a legal practice devoted to serving startups at a reasonable cost, I am keenly interested in these subjects.
One really interesting set of documents is called “Series Seed,” an open-source legal project being curated by a Bay-Area venture capital attorney. His premise is that “there are not that many issues to negotiate in a simple equity financing” and that the Series Seed documents “represent the 95% consensus of what should be in a very basic set of equity financing documents.”
The set of documents assumes that the round uses a C Corporation structure, which works fine for some startups though others may have reasons to prefer a “flow-through entity” such as a LLC. It would certainly be possible, of course, to create an equivalent set of documents for a LLC.
I’m digging into the Series Seed documents now. I would be interested to know what others think. It’s time for the Midwest to weigh in with some opinions here.
Lawyers, by nature, are a conservative lot. That’s a good thing up to a point. You don’t want your attorney to be one of those people who goes off half-cocked. But when lawyers reflexively follow bad habits handed down from one generation to the next, it can be a problem.
Look no further than a typical contract. There, you find all sorts of customary but senseless practices: using terminology from the Middle Ages such as “Witnesseth” (which means, exactly, what?) and expressing a number in both words and numerals (“At least thirty (30) days prior to Closing…). The first example is strange though probably harmless. The second habit, though, can easily become an issue for litigation, since lawyers making last-second edits can easily change the numerals while overlooking the words, or vice-versa, resulting in contradictory language. How do you interpret a contract provision that reads, “At least thirty (45) prior to Closing…”?
Why in the world would you need to express a number in two different ways? Is there some universe in which the numeral “45” needs to be clarified? But when you look at most legal documents, it is apparent that redundancy is part of the lawyer’s standard toolkit. You almost get the feeling that, like Dickens, attorneys are paid by the word. (They’re paid by the hour, which is almost the same thing.) The cumulative effect of these kinds of practices is to create documents that are excessively long and painful to read, without being especially clear. It’s just poor drafting.
Lawyers should strive for clarity and economy of expression. It is not easy to unlearn one’s bad habits, but one ought to try. It starts with the independence of mind to see that they way you’ve always done things is not necessarily the way that they should be done. Kudos to people like Ken Adams, whose “Manual of Style for Legal Drafting” reflects his one-man crusade to get lawyers to be more clear, concise and consistent.
