The Next Step in Standardized Term Sheets: VC Declarations

There has been a lot of fantastic chatter over the last few weeks about standardized funding docs. I caught wind of it from (no surprise) Brad and Fred‘s fantastic posts on the VC side, which led to Chris Dixon’s also amazing post on the entrepreneur side of the equation.

I love the fact that some firms, particularly law firms, are starting to release standardized funding docs.

A Lil’ Bitta Background

If you’re familiar with why standardized funding docs are important, skip this section :)

If you’ve never raised a round of funding before, you might be really surprised to learn that you can often agree on the principal terms (valuation, round size, board composition, etc) within a couple of weeks of pitching for the round. You then go through a period of Due Diligence, which is pretty normal, and finally you move on to LEGALS.

The challenge is that not only can this take 2 weeks to 2 months, but that:

• Each side is on the hook for their own legals if the deal doesn’t close (there are few things scarier than watching your legal bills go over the $20K mark, when you only have $10K in the bank)
• When sides do negotiating, particularly through their law firms, you can often have 3-10 lawyers in a room negotiating at $300-500/hour each
• This process can end up costing 50-100K

Some Sample Docs For Ya

Everyone involved agrees this is silly, which is why standardized funding docs are so critical. Both sides agree on a  pair, both sides negotiate primary terms, both sides get a lawyer to look over final docs, closing docs, deal book, etc, and you’ve just shortened your time to deal completion by likely weeks (if not months). As my friend Mario would say, Hey bada boom bada bing!

For context, here’s TechStars’ standard docs, Y Combinator’s and some standard terms from the National Venture Capital Association (NVCA for short).

The Next Step Is…

Brad says the next step is for all  the big startup/funding law firms to actually standardize their docs. While that’d be great, I actually think there’s a more constructive next step: for VC firms to declare, publicly, that they agree with any or all of these docs on principle.

I kind of look at it like the whole RSS 1.0 / RSS 2.0 / Atom debate from a few years ago. Sure, having all of the teams standardize on a set of docs (a syndication standard, if you will) would be great. But ultimately, having a set of standards is the big thing. Pick one, pick all of them, entrepreneurs don’t (or shouldn’t) really care. They’re all quite reasonable, after all. Knowing a firm supports a standard makes our job of picking a firm and planning a funding round’s timeline 4x easier.

Ultimately if VC firms publicly declare their support for specific standards (even if it’s just via Partner blogs, like Brad and Fred’s), they’ll not only shorten the deal time,  but they’ll also put themselves firmly in the middle camp of being focused on getting good deals done. And, as an entrepreneur, that actually ratchets up my respect for them.

At the end of the day, we need to focus more on getting back to business, and less on an archaic process on the VC side of weeding out the chaff by putting them through some convoluted gauntlet. Either your interview/partner/DD process works or it doesn’t. If  it does, don’t use Legals as a second gauntlet. If it doesn’t? Standard/good/bad legals are the least of your worries.