“First they ignore you. Then they laugh at you. Then they fight you. Then you win.” Mahatma Gandhi
I hesitate to use a quote from one of the greatest people ever to grace planet earth, and certainly the question of how to structure early stage investment is a laughable cause as compared to the rights that Ghandi (also a lawyer) fought to advance. That said, I think this quote accurately captures the life-cycle of creating a simple set of documents for early stage investment.
I’ve attached version 2.0 of the Series Seed Documents as well as a red-line showing the changes I’ve made from the original set. If you peruse the red-line, you will see that there are not many changes. That’s because there are not that many issues to negotiate in a simple equity financing. Of course, one could argue, that I’m just not taking comments I disagree with (or that nobody cares enough to comment), but I am of the opinion that these documents represent the 95% consensus of what should be in a very basic set of equity financing documents. Based on the comments received, both on the blog and in the many deals in which these documents have been used, I am convinced that the terms of a simple set of equity documents are really not an issue. I don’t mean to say that the Series Seed are infallible, but there are no major objections to their content.
Why use Series Seed Documents instead of capped convertible debt? This seems to be the real issue. In my opinion, the reason that capped convertible debt is the current market leader is that entrepreneurs have been conditioned over time to believe that convertible debt is (a) faster (b) cheaper and (c) better for them than equity investment. This is EXACTLY why I created the Series Seed Documents. With Series Seed:
- Costs should be roughly the same (if not cheaper) than using industry standard debt documents. There are a number of different convertible debt documents out there and there will likely be some back and forth whereas these are standard documents.
- Same point for speed. If parties agree to Series Seed Documents, should be faster than debt documents since there is some negotiation with debt documents from sophisticated investors.
- Series Seed Documents are transparent: no hidden gotchas can get served up in definitive documents. You can review them right now if you want.
- Equity documents give investors more clear definition around rights, more stability and less potential squabbling in the next round.
- Equity gives investors the opportunity to get long term capital gains tax treatment if early exit.
- With minor manipulation, Series Seed enables multiple board structures without tortured and non-functioning agreements (a real problem for convertible debt documents); and
- Entrepreneurs get price certainty instead of the lower of two different prices as with capped debt.
In sum, Series Seed creates a level playing field between capped debt and equity documents in terms of speed and cost. When one studies the (admittedly highly technical) benefits of Series Seed vs. price debt, Series Seed is a better solution.
There has been a robust debate on this topic with folks like Fred Wilson, Paul Graham and Seth Levine all chiming in. To clarify, there is no question that as an entrepreneur you would prefer uncapped convertible debt to equity. As Josh and many others point out, this is typically not a fair deal for the investors and many investors won’t do it, or will only do it for people that they are blindly in love with. Also, Seth raises some interesting points about ecosystem health, though most entrepreneurs I know aren’t too concerned about killing the golden goose. Once a price cap has been introduced, however, Series Seed Documents are a better solution to getting the first round complete for both entrepreneurs and investors.
Ted Wang is a partner at Fenwick & West. He is the original author and current curator of the Series Seed Documents. He lives in Palo Alto, California with his wife Michele, two children, Kate and Jake, and attack dog Oakley. More information on Ted can be found on Facebook, Twitter and LinkedIn.
BEFORE DOWNLOADING THESE DOCUMENTS PLEASE READ THE DISCLAIMER
Neither I nor Fenwick & West, LLP assumes any responsibility for any consequence of using these documents. These documents have been prepared for informational purposes and is not intended to (a) constitute legal advice (b) create an attorney-client relationship (c) be advertising or a solicitation of any type. Each situation is highly fact specific and requires a knowledge of both state and federal laws and therefore any party should seek legal advice from a licensed attorney in the relevant jurisdictions. Both I and Fenwick & West expressly disclaim any and all liability with respect to actions or omissions based on this website.
File Name: certificate-of-incorporation-redline-version
File Name: investors-rights-agreement-redline-version