Startup Toolbox

Jay Parkhill June 27th, 2008

I recently re-read attorney Ted Wang’s great proposal to simplify Series A financing documents in venture capital investment transactions.  He is completely correct that there is a lot of inefficiency in the way those deals are structured.  A bit of housecleaning would streamline the process a bunch.

The counterargument is that as attorney I don’t want to spend a huge amount of time renegotiating the form of the documents.  Ted has a few suggestions that will take more effort to adopt widely, and others that are really no-brainers in almost every deal, venture financing or otherwise.

Number 1 for me on the no-brainer list is the Secretary’s certificate and incumbency certificates that go along with most transactions.  These say that the Board has approved the transaction and that the people who sign the documents actually hold the offices they say they do.

This is a pet peeve of mine because the company already represents and warrants in the agreement that Board has approved the deal.  Saying it again in a separate document serves no benefit.  As well, the people who sign the incumbency certificate are, at least in most smaller companies, the same as the ones who signed the agreement.  Getting them to verify their titles adds no material benefit.

There is an exception here- if the deal is signed on one day and closed on a different one, then I completely understand the value in “bringing down” all of the reps and warranties to the closing date and verifying that the information in the agreement remains up to date.

Where this leaves us: the Secretary’s certificate and incumbency certificate are unnecessary in 99% of deals and result in extra time spent drafting and wasted paper.  However, they are valuable once in a while and I don’t want to bill my clients for time spent fretting with opposing counsel about whether this might be one such case.

So here’s my suggestion: leave the language requiring those certificates in the document, but add a short line saying that the certificates must only be delivered if the closing occurs on a different day from signing of the documents.

It’s a simple suggestion- 10 minutes to discuss and drop a phrase into the relevant part of agreements that could cut out an hour or two of attorney drafting and review time.  We’ll see how it works in the real world.

• Uncategorized , lawyering , pet peeves

Jay Parkhill June 21st, 2008

Anyone who has talked to me for any length of time knows that I am nuts about bikes and cycling.  Getting out regularly is incredibly important for my mental as well as my physical health and well-being.

It helps in my work too.  I realized today that I have puzzled through a remarkable number of work problems out on my bike.  Being in the office involves so many distractions that it can be hard to find time to think straight through one topic for very long.  Once I get out on my bike I usually end up rolling around one idea for a while in my head, thinking it through from a lot of angles.

I’m not an especially fast thinker on the bike.  Traffic, stop lights and navigation all take pieces of my attention.  Somehow that helps too, perhaps because those distractions are transient compared to the demands of multiple long-attention-span projects I face while sitting at my desk.  I let an idea bounce around a bit, set it down to focus on getting over a certain hill, then pick it back up.

Sometimes I get lucky and it seems like the idea has kept tumbling on its own and some new angle appears that I hadn’t considered before.

I find this all fascinating.  Some problems can’t be muscled through.  They just need time and quiet space in my head, and then the path to a solution start to lay itself out.  Cycling is how I make that space.  It sure beats lying awake at night stressing out about them.

• Uncategorized , cycling , lawyering

Jay Parkhill June 19th, 2008

File this under pet peeves:  I work through a lot of agreements of all different kinds.  Every single one has a “Notices” provision.  The purpose of this language is to avoid arguments about whether notice was properly given of certain events.  It only becomes an issue when the relationship has broken down, and basically serves only to avoid arguments about the terms of the argument.

That said, 95% of the agreements I get say that notice may be delivered (i) in person, (ii) by Fedex or registered mail, or (iii) by fax with a confirmation copy by mail.

How often do you communicate by fax with people compared to email?

It’s not a huge point, but one of the items on my transaction-document checklist is to make sure that the communication methods reflect the way we actually communicate.  I have a standard paragraph I drop in to agreements that says people can provide legal notices by email (with a confirmation copy).  It takes about 30 seconds of extra time on my part and has saved a bunch of running around on the few occasions I have had to actually follow the notice procedures.

• Uncategorized , lawyering , notices , pet peeves

Jay Parkhill May 30th, 2008

June 1 marks the two year anniversary of starting my solo law practice. Recently a friend asked if it was what I expected, and it has taken me until now to think about how to really answer the question.

The answer is yes and no (you expected something different from a lawyer?).

Yes, the work itself is what I expected. I do more or less the same thing I did when I worked in larger law firms- a mix of (i) brand-new startups focused on getting off the ground and raising money and (ii) later-stage companies concerned with negotiating and signing revenue-generating deals as efficiently as possible.

The no has to do with the structure of the business itself. Working for yourself means wearing lots of hats.  The other day someone called and asked for the “billing department”, which interrupted the “maintenance department” in the process of changing a light bulb in my office, both of which stopped the lawyer from doing the actual work of my business- advising companies and negotiating transactions.

I knew that part intuitively, but experiencing it firsthand is totally different. I have advised startups and company founders for ten years now, and having been through the startup process myself I have a *far* deeper understanding of how hard it can be to juggle all the balls that need to stay in the air to keep a business running.

So to all my past and present founder clients- nice job keeping it all going, and keep up the good work!

• business models , lawyering

Jay Parkhill November 10th, 2007

Attorney/entrepreneur D C Toedt posted a thought-provoking piece on his blog called the “Pathclearer” approach to commercial contracts. The premise, as articulated by an attorney at English brewer Scottish & Newcastle, is that commercial agreements and one-time transactions are different beasts, but lawyers erroneously tend to treat them the same.

An M&A transaction, for example, is a one-time occurrence. Details are tremendously important because if something goes wrong the only practical recourse may be litigation.

A commercial agreement, on the other hand, is the start of a relationship. For the most part, both sides will perform happily so long as it benefits them, and poorly or not at all if it doesn’t- i.e. there is no way in the real world to force a relationship to work if one side doesn’t want to be in it.

That being the case, Pathclearer asks if simpler and shorter agreements might work better in many cases. Start with a bare agreement to work together and add in only what is necessary to make the parameters clear.

I love this approach, and for many reasons. The Pathclearer article points to a great example of a relationship bound up with such a complex set of documents that even after both sides agreed the relationship wasn’t working they couldn’t change it because they couldn’t figure out with certainty what the terms of the deal actually were.

Even more to the point, this sort of “blank slate” approach might (we hope) let people think about the issues that are actually important rather than wordsmithing the fine points (such as the example of hours spent by the lawyers trying to define “beer” precisely).

At the same time, would a company (or a lawyer- such as me, perhaps) look hopelessly naive trying to put this idea into practice? I can see the Pathfinder idea working very well in certain situations and causing enormous consternation in others where the experiences of the opposite side lead it to feel that every detail matters (as I have found to be the case with many large organizations).

Rather than a specific plan of action, then, I take the Pathclearer approach to heart as a philosophy. I believed in the idea before I saw the article, or I probably wouldn’t have paid much attention. Still, it is useful to think about the purposes of the Pathclearer concept, and approach commercial agreements with those thoughts in mind:

*Identify the business concerns before reviewing the agreement
*Focus on the key issues. Remove or ignore stuff that doesn’t matter
*Avoid tinkering with the language that isn’t critical
*Reduce and simplify as much as possible

• contracts , lawyering , legal

Jay Parkhill September 26th, 2007

Dave McClure posted a rant the other day about how VCs and technology lawyers spend a lot of time around startups, but rely on antiquated communication systems (fax!) to do deals.

He’s right, but what’s interesting to me is *why* “[we] guys are still in the 80’s”. Digital signatures are perfectly legal, but no one uses them.

I think the reason is that everyone spends so much time thinking about the deal itself, that no one puts much effort into the mechanics of completing it. Fax mostly works because most people have fax machines.

On the flip side of the coin, in just about every deal I’ve ever done I have ended up chasing someone for a signature. Someone is inevitably travelling or not near a fax machine. Internet access is so ubiquitous- I would love to have a “virtual closing room” on my website where people could log in and digitally sign documents. This would save a huge amount of time and energy on my part and presumably everyone else’s.

It takes two sides to close a deal, though, which is probably the other big reason things like this haven’t taken off. To do it right, I would have to (a) provide each party to the deal with login information and a way to authenticate individual identities, or (b) somehow coordinate my digital signatures with the other side’s, or some combination thereof.

It’s worth a try, though.  Can anyone tell me how to build such a facility?

• lawyering