With the legal documentation process for startup entrepreneurs getting complex, a standard set of seed series financing documentation could help simplify the process to a large extent.
When I was thinking of a topic to write for this issue, it struck me that there is a pressing need to standardize the documentation process while raising funds.
A startup entrepreneur, who is raising seed money, won’t have much to do with respect to financing, term sheets and legal documentation if there was a Memorandum of Understanding signed by all venture capitalists or seed investors with startup entrepreneurs to use as a standard set of documents. The reason for this is that the entire process of legal documentation for early stage companies has become far more complex than is necessary. In fact, on a large majority of these transactions, the investors and entrepreneurs use documents related to further financing rounds and modify (read copy-paste-delete) these to arrive at a set of documents for a seed round.
I know concerted efforts have been made in Silicon Valley towards this purpose and a standard set of series seed financing documents have thus evolved (Look up series seed, Y-Combinator, Tech stars). Although there is no consensus on its usage by seed investors, there is consensus that this would be the ideal starting point for the various investors, entrepreneurs and professionals in the seed investment ecosystem.
But more needs to be done. Let’s make an attempt here. What if we start a standard term sheet conversation in India? While the requirements for each term can vary, I definitely think there can be consensuses on the kind of term sheet seed investors are likely to want. For example what would you change about the following? (see table)
Primary reasons why this model usually encounters some resistance is; one, there will be resistance from law firms, two, investors want additional protection (doesn’t matter that it is only seed).
However, reasons why this will succeed is; one, investors agree seed is different from A or B rounds and this level of detail is sufficient and, two, start up entrepreneurs will be more in the know with the requirements since they will not have to deal with too many surprises and sophisticated negotiations that they do not do for a living.
I think investors, law firms and accountants should view the measure of success as having saved costs to start up entrepreneurs and for having simplified life in general!
This article first appeared in Smart CEO and was authored by Aarthi Sivanandh.