Early stage venture firm Y Combinator which has funded over 102 young startups, has “open sourced” the legal documents that they provide to their startups to use as they seek additional funding beyond what they’ve gotten from Y Combinator. The documents were created with their law firm, Wilson Sonsini Goodrich & Rosati and are available at http://www.ycombinator.com/seriesaa.html.
The goal, says Y Combinator cofounder Paul Graham, is to help young startups avoid at least some of the legal costs associated with that first round of financing. The lawyering fees don’t vary much based on the size of the round, and so a significant portion of small rounds can go directly to the lawyers on the deal. Companies are routinely forced to pay the legal bills of the investors, too, making the situation worse.
Jeff Clavier, the founder of early stage fund SoftTechVC, told me yesterday that the average legal bills on a deal are $20-$30k. Other angel investors gave estimates in the same range.
The Y Combinator documents are designed to have “terms close to neutral, in the sense that
they favor neither the investor nor the startup,” said Graham in an email. Using them has the potential to significantly reduce legal costs.
We’re hoping that this will cause there to be a lot more startups. I know (because for many years I was one) that there are a lot of rich technology people who would do angel investing but don’t because it seems like a schlep. And obviously there are lots of startups desperate for funding. We’re hoping this document will bring a lot more of them together.
Is Y Combinator helping their competitors by making the legal process easier? Absolutely. And Graham doesn’t seem to mind.
On a related note, earlier this year TheFunded started allowing entrepreneurs to publish the various term sheet clauses that venture capitalists were asking for.