Early stage venture firm Y Combinator which has funded over 102 young startups, has “open sourced” the legal documents that they provide to their startups to use as they seek additional funding beyond what they’ve gotten from Y Combinator. The documents were created with their law firm, Wilson Sonsini Goodrich & Rosati and are available at http://www.ycombinator.com/seriesaa.html.
The goal, says Y Combinator cofounder Paul Graham, is to help young startups avoid at least some of the legal costs associated with that first round of financing. The lawyering fees don’t vary much based on the size of the round, and so a significant portion of small rounds can go directly to the lawyers on the deal. Companies are routinely forced to pay the legal bills of the investors, too, making the situation worse.
Jeff Clavier, the founder of early stage fund SoftTechVC, told me yesterday that the average legal bills on a deal are $20-$30k. Other angel investors gave estimates in the same range.
The Y Combinator documents are designed to have “terms close to neutral, in the sense that
they favor neither the investor nor the startup,” said Graham in an email. Using them has the potential to significantly reduce legal costs.
We’re hoping that this will cause there to be a lot more startups. I know (because for many years I was one) that there are a lot of rich technology people who would do angel investing but don’t because it seems like a schlep. And obviously there are lots of startups desperate for funding. We’re hoping this document will bring a lot more of them together.
Is Y Combinator helping their competitors by making the legal process easier? Absolutely. And Graham doesn’t seem to mind.
On a related note, earlier this year TheFunded started allowing entrepreneurs to publish the various term sheet clauses that venture capitalists were asking for.
This is a great development and I think an impressive action by Ycombinator. Ideally the funding ecosystem should be fairly transparent and simple. Even for deals with very specific needs this type of thing provides a good benchmark for both funders and the funded.
Wow, Paul Graham rocks! This will be awesome for bootstrap startups.
Awesome move by Y Combinator. Stuff like this is really valuable to give people a starting point, but also to give them an idea of what constitutes “neutral” (not favoring either side) in the eyes of someone so experienced in funding startups.
Kudos to PG and YC.
That is so sweet. Thanks Paul!
Those docs will only work in funding of corporations. LLCs distribute parts of the company in “units” as pictured here. You sign the certificate and stamp it with the wax seal.
As pictured here.
http://www.flic...988605/sizes/l/
Because of that they’re neither common nor preferred like a corporate company’s private share certificates.
So if an non-corporate filing LLC were to use these docs they would have to be heavily edited by an attorney and it would still end up costing 10-20k.
Or am I wrong?
likely true, but the majority of investor backed tech startups are C-Corps, so its aimed at them. A little modifying is still better than starting from scratch.
you are right, but the vast majority of investors greatly prefer corporations over LLCs.
By wax seal of course I meant the stamper thing that imprints your company info into the paper as beveled edges.
This is a very interesting development. I can’t see how it’s going to hurt startups! Legal costs have always been a challenge for very early stage companies. I’m interested to see if other ‘incubator-stage’ firms follow suit.
Again YC shows that “you can do well financially, by doing good”. YC is disturbing the industry in every possible way and I am sure there is more to come. Looking fwd to Demo Day.
Simply AWESOME! I may never get the opportunity to use these docs but at least I get to see them first hand and really understand (or try to anyway) what they’re made of.
A big that thank you to Y-comb and TC on this one!
Can somebody tell the rest of us why these companies are filing as corporations instead of LLCs and why all the docs are geared towards corporations??
I understand the Delaware part, but why a corp?
The reason I wouldn’t re-incorporate is because you get double taxed pre-funding. Say it takes you 2-3 years to get funding, the founders are taxed twice because there is no alternate filing for corps.
I mean, how are YCombinator startups which fund out 5k per person doing corporate structures?
Sorry if this is too off topic, but those of us with LLCs may want to know.
LLC’s are vastly overrated for emerging tech startups (people listening to too many LegalZoom.com commercials). They only make sense if (i) you’re generating a lot of revenue (that’s a very, very small % of unfunded startups) or (ii) the founders have put a large chunk of money into the company (real money >$50K) — again, rare for startups.
@T3chlusive: The vast majority of angels making equity investments either (i) prefer not to invest in LLCs or (ii) if they are limited partnerships, are actually prohibited by their LPs from investing in LLCs (because of the UBIT tax). Nearly all equity investors in Silicon Valley will make the conversion from LLC to C-Corp a condition to closing the round.
As a small company founder, you simply can’t afford to be taxed twice on income.
I hear you that most startups are in the red anyway, and will only get taxed on employee deductions. BUT, small bootstrapped companies are in a different position.
A company like ours has to keep making money to pay bills and other expenses, so we can do R&D and post huge losses.
A corporation is impossible for bootstrapped companies. You need the joint filing on the LLC.
The conversion isn’t a bad idea if the funding is for a very large amount, but that conversion must cost a fortune in legal bills.
A S-Corp has the same tax treatment of a LLC.
Most start-up start as S-Corp, and then switch to C-Corp upon funding or other events that might make a C-Corp more beneficial.
The major draw back of a hi-tech start up that select LLC as their corporate structure is that it limits the exit strategy to an “asset sale” only, while the vast majority of M&A events are “stock sale” transactions.
“so we can do R&D and post huge losses.”
That should be “so we can’t do R&D and post huge losses.”
Their a little late to the game as forms can be found on numerous sites such as VC Experts.com, AllBusiness.com, Docstoc.com
http://vcexpert...ity/startupkit/
http://vcexpert.../library/forms/
I’m actually a member of VCExperts. I had purchased your enterprise $795 package.
http://www.flic...930952/sizes/o/
I was wondering if you have forms so i can sell LLC “units” to my friends and associates at other companies?
I would like to avoid legal costs as well, but we do not have a corporate structure.
Do you have a link for me to get those forms?
Great initiative by Y Combinator allowing entrepreneurs to save on legal costs. Thank you YC!
great post
this is what tc blog following is all about: tangible advice combined with entertainment value on some days-
definition of open source and transparency
now maybe someone can write a post simplifying converts and discounts on the “real” round
especially for the 1000 praying in the demo pit who read this every 20 seconds
thanks mike
This is super handy. Thanks Paul!!
$20k+ for legal bills does not sound very efficient. Why can’t startups find some relative of a relative who could do it for cheaper? I guess once a startup receives funding, being efficient does not matter as much.
Alex – this sounds good in theory, but can be very expensive in practice. If the relative of a relative doesn’t have the right background and makes mistakes, you’ll be spending a lot more than $20K to fix them later on.
Could’ve used this three months ago.
It’s silly to think about the fact that many times legal documents stand in the way of letting people realize their dreams. Big time kudos to Paul Graham and YC for opening this up and making the world a more beautiful and startup friendly place.
Bureaucracy should never stand in the way of innovation.
Off Topic: TechCrunch, can you PLEASE PLEASE implement Disqus commenting on here? It is so much nicer than whatever you are using now.
Michael,
Do you know if WSGR consented to this? Interesting IP question regarding who owns the forms.
Nick
Keep it coming. Down with the establishment.
This is great news! Could someone back that out into a term sheet/summary?
“Is Y Combinator helping their competitors by making the legal process easier? Absolutely. And Graham doesn’t seem to mind.”
when you opensource anything, it helps the competition atleast theoretically. but it gives good PR and shows the goodwill. this PR is enough to attract more good startups towards them
Of course, this is completely unusable to anyone outside the USA…
start a company as a C corp, then get automatic S corp status from IRS (you will be taxed like an LLC). Then convert (automatically) back to C corp once you get an outside entity (aka VC) to invest in you. If you started an LLC, you got bad advice – probably from a bad lawyer, because lawyers love LLC’s.
Yeah, you definitely don’t want to go with legal filing advice from lawyers — their interests are gonna be inherently conflicted.
Think about it.
Much better to take more savvy advice from TC discussion threads.
Are the Links Working?
“HERE” ??
the “here” link is definitely broken.
broken link – Damn! At least double check your post before publishing!!
Cool idea, It definitely helps to overcome that first major hurdle. Props to Paul
Thanks Paul,
Wow.. in just this move, overnight you’ll endear thousands of entrepreneurs to Y Combinator. Thats what I call a smart move. Thanks Paul and the Y Combinator team.
Would anyone like to work with me on the UK version? If so, please send an email message to me@mo.md. I would love to have this ready in time for my own startup’s first funding round.
“here” link doesn’t work…..
This is nothing new. The NVCA has had “open source” (aka free) legal docs on their site for years now. These were developed by teams of lawyers and VCs and reflect the range of different options available in financings.
http://nvca.org...model_docs.html
A few things to note, speaking as a former VC:
1. When you complete a venture financing, you’re not paying $20K to a lawyer just to fill out a couple of forms pulled from their filing cabinet. There’s lots of additional items that must be completed correctly. It’s not rocket science, but believe me, when something isn’t done correctly with the initial incorporation/capitalization, it is extra-expensive and painful to correct (e.g., if the company used some template forms off the web to improperly solicit investors in potential violation of securities laws, etc.).
2. No law firm is drafting these documents from scratch. The documents aren’t the constraint. The constraint is checking to make sure that all of the various records of the company are clean and properly established.
3. Free documents or no free documents, a VC firm investing in you is going to use their lawyers to check to make sure everything is done properly. Again, not a terribly complicated process for a lawyer, and perhaps overpriced, but neither is taking out your appendix typically complicated (as surgery goes). You still wouldn’t necessarily choose the lowest bidder.
4. $20K isn’t anything to sneeze at, but these sorts of mechanical items are rarely the big issue they seem to be. Just keep in mind that when you sell your amazing Web 2.0 company to a bigger sucker, the fancy investment bankers you hire (or the acquirer hires, paid for out of your purchase price) are going to make the lawyers seem absolutely cheap by comparison. And they’ll do a whole lot less to earn it.
ya link is now broken. please correct, i would like to see the list. thanks
Mr Investor — tear down that wall!!
BTW, the legal firm provides more than monkeys with forms. Their networks are very much worth their weight. Also a good legal firm does the VC terms so they can guide you on benchmark and acceptable terms so neg. a deal happens much, much quicker.
So open source everything, but at the end of the day its experience that you can’t open source.
Working link please? Or at least an explanation that the link has been removed would be nice
is it just me or does the link not work.
Link’s not working.
The link was http://www.ycom...m/seriesaa.html, but it now contains a message saying there was a glitch in the docs, and they’ll be back up soon.
@ Humpy Bogus
I’ve never understood why the company taking money has to pay the legal bill for the VC. Could you explain? Thanks!
The company pays for several reasons:
1. The company is issuing securities. The issuer has a fair amount of legal work to do in this situation, even if no professional investor were involved. The company is going to have lawyers to pay no matter what–even if all the money were coming from the founders themselves.
2. Often, there is more than one investor, so it’s a convenience to have one client (the company) organize and pay for the legal work for everyone.
3. The golden rule: he that has the gold makes the rules. If VCs had to pay all the legal bills, they’d just invest $X-($cost of legal fees) for the same % ownership after the transaction.
This is not as Machiavellian on the part of VCs as you might think. As a VC, we don’t gain anything by spending our money (which becomes your money) on lawyers’ fees. We’d rather the money go to the company, as that will help it succeed, which is how we ultimately get paid. It’s just unavoidable that lawyers are required, and the most convenient solution is to have the company counsel that does the work for everyone involved.
Is anyone able to download these docs? Michael, looks like the “here” link is broken.
No Link! No Link!
Yeah. There is a glitch in the documents. They are copyrighted by Wilson Sonsini and good luck if you think they will every be posted again.
“glitch” my arse.
Wilson Sonsini likes collecting 30K from founders for the privilege of firing up a word processor and doing Find-Replace on the company name.
Nonsense like this is a drag on productive people everywhere. Perhaps it’s time to start posting legal document templates to Pirate Bay? TC brain trust needs to start thinking about ways to disintermediate the legal industry…
Can someone who already downloaded the docs post them somewhere please if possible? thanks in advance.
yes it would be nice have a mirror download link.
thanks
You would think that Y Combinator would have been more responsible than to announce these documents, which are now not avail. Tech Cruch needs to report on this asap. No explanation of what’s “wrong” with the documents. If you’re posting open source documents, then tell us what’s wrong with them. Haven’t these people learned anything over the last 18 or so years? No transparency, no confidence. Why should I use these docs now? Makes me think something is shaky with them.
Tony, could you send me the documents if you downloaded them….I seem to have missed them. nuvofilms(at)gmail.com
Thanks
Shit ! I had a chance to download them, but i thought i will do them later. But now it is gone ! Damn !
If anyone has it please post those documents in Scrybd or just anywhere
Do you guys think Y Combinator is a good route to raise funding after launching a site that is in Beta version and we first test it out to get the people reaction. Or do they only provide funding for companies that are in their initial ideas stage.
We will be launching our beta version soon and getting users feedback before we raise funding. What would be a good route to raise funding? Are they any good articles on this topic.
Thanks,
Ket
Paul, please put up a wiki for the documents so founders have a way to cut through the legal language before bringing in their own lawyer.
Kudos.
HERE IS A LINK FOR THE 5 DOCUMENTS:
http://rapidsha...inator.zip.html
Thanks a lot, Max!
Thanks a lot Max …. I had thght of downloading it later and it was gone …
A few notes:
1. Seed-stage deals that first sell equity aren’t doing themselves any favors. We work hard to always do fair convertible debt, which is much cheaper from a legal perspective, much more founder friendly, and preserves stealth mode per the Form D problems Josh Kopelman highlights here: http://redeye.f...eath-of-st.html
2. I’ve posted our note form on Lookery’s blog: http://blog.loo...ch-post-comment
@humphrey
– Seed stage deals don’t need much if any custom lawyering unless either the founders or the investors are attempting to assert unreasonable control or take financial advantage.
– We start with the NVCA docs when equity deals are appropriate, but the Y Comb docs will be more popular. Your average founder has a lot more trust in the Y Comb brand than the NVCA. WSGR making Y Comb take their docs down reinforces these sorts of perceptions.
“Your average founder has a lot more trust in the Y Comb brand than the NVCA.”
Couldn’t agree more!
“WSGR making Y Comb take their docs down…”
Where’d you hear that? Sounds like a good TC story…
I very much doubt WSGR required the forms to be taken down, especially since the message about the documents on the Y Comb site includes some very lawyer-like disclaimers about using them. I wouldn’t be surprised if WSGR supported it as a natural way for them to pull in more clients in a tough economy.
Plus, all major silicon valley firms defer billing for start ups until funding comes in — if companies get started using WSGR form documents it may help them limit their losses on these fee advances when the companies go belly up. Once they get funding, any major investor would insist on the Company getting some type of legal representation, so it’s not like the lawyers are getting eliminated from the process — just eliminated from the low margin stuff.
Want a benchmark for terms:
http://pedatace.../pedc/portfolio
http://pedatace...olio/investment