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Angel Financing Without Hellish Legal Fees


It's great to hear stories like the one where Andy Bechtolsheim handed the Google founders a $100,000 check before they even set up their bank account. Convince an angel to invest and you're off to the races! However, what many aspiring entrepreneurs don't know is that after the one or two page term sheet there are dozens of pages of documents that go into even an angel financing.

Since law firms have templates for these deals you might think it's no harder than copying and pasting. The problem is there are lots of different templates floating around law firms, and a countless number of terms that could be changed. Many of these terms really don't make too big of difference, or if they do their effects are so hard to anticipate that arguing over them isn't worth the time. Lawyers get paid by the hour so they have an incentive to find terms they don't like (and there are always terms to not like). So lawyers will often spend weeks bickering over trivial issues, racking up $10,000s of legal fees, delaying the financing and putting the deal itself at risk.

Enter angel fund Y Combinator, which has just released the financing documents it has standardized and used with dozens of entrepreneurs. If these documents get a reputation for being fair (which is likely given the Y Combinator's good reputation), they could save million of dollars in legal fees for startups. The key is that both the entrepreneur and the investor trust that the Y docs are a fair deal for all, and trust enough to tell their lawyers not to mark it up! This could do to angel investing what Creative Commons did to copyright or what McDonald's did to hamburgers.

UPDATE (8/14): Scott Rafer (a past VV guest) posted his convertible debt note (direct link to doc) he's using for his current company, Lookery. Rafer did a convertible debt deal, which has many advantages as my friends at Venture Hacks have argued. On the other hand, Josh Kopelman has argued against it, pointing out several disadvantages. It seems to be the type of issue that could go either way depending on the dynamics of the particular company, oppertunity and investors -- but if we had a standardized set of docs for each verified by a trusted third party it'd be very powerful. The NVCA did this for later stage docs (of course they're funded by the VCs). Who could do this for convertible debt rounds?

Posted by Greg Galant on Aug 13, 2008 | Permalink | Comments (4) | TrackBack (0)

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Comments

Series AA Equity Financing Documents

Sorry, there's a glitch with the documents and we had
to take them down. We hope to have something back soon.

Posted by: Anonymous at August 13, 2008 11:14 PM

Greg, it's not a term sheet. it's the actual legal binding not. Nothing else needed as long as you are incorporated.

Posted by: Scott Rafer at August 14, 2008 1:46 PM

Scott, I mistyped. Just fixed.

Do you use a overview or TC first to get people on the same page, or just send folks the closing docs?

Posted by: Greg at August 14, 2008 2:00 PM

I send out a 2-pager and then do a deck in person when appropriate. I never, never send out the deck. It should have so few words in it as to be meaningless with out the founder standing there pitching. The point of the pitch is selling the person responsible for using the money well, and only secondarily to sell the company.

Posted by: Scott Rafer at August 16, 2008 12:02 PM