

Ask HN: Are open-sourced documents good enough to open a company? - EGreg

Hey guys. I am on the verge of getting funding for my company from some family friends, and I could really use some advice from those in the crowd who are familiar with setting up the legal paperwork for a startup that is getting funded.<p>Lately we have YC, TechStars, Founders Fund and others open sourcing the documents they use to open a Delaware corporation and set up the investor structure in the right way.<p>Fred Wilson recently posted on his blog regarding standardized funding docs, where he actually prefers them, because they make it easy to understand how things are structured, when you enter into talks with VCs. I suspect that many VCs appreciate this.<p>http://www.avc.com/a_vc/2010/03/standardized-venture-funding-docs.html<p>So that leads me to ask ... how much more needs to be done that is not covered by the standard docs? If we assume that the investors are your friends &#38; family and aren't out to do a high powered negotiation -- they just want to set things up correctly and keep going.<p>1. Can we do this ourselves by reading the docs and filling in the blanks?<p>2. Can we get a lawyer to look over it for a couple hours and help fill in the blanks? (Much cheaper than a custom opening of a company)<p>3. Could anyone outline the steps that we'd need to take if we wanted to use one of these documents and work with our investors to open a company correctly? Preferably with a convertible note?<p>I want to set things up correctly, but at the same time I am wondering what I would be paying the lawyer to do. This isn't a rhetorical question, I really just want to know what I'm missing and what the pitfalls would be if I tried to do it myself.<p>I'm sure a lot of entrepreneurs have the same question. They probably would have written it in a more concise way though :)
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jeffmould
IANAL, but in my opinion "open source" documents are great for providing a
"guide" to getting your documents in order. They are not meant to be an end to
lawyer or accountant involvement. When Fred talks about standardized documents
he is not talking about "do-it-yourself" documents, he simply means to
eliminate the many different forms and wording that different
companies/lawyers use when creating these documents. In this sense each
company would essentially be created the same and it would make future
financing, etc.. easier on the company and investors.

With that said, there is nothing stopping you from doing this on your own.
However, when you start taking outside investment, even in the form of
convertible notes, you open another realm of laws/regulations. For example,
investors must be accredited, there are tax laws that apply for shares of
stock and capital gains on them, etc... These all need to be addressed.
Additionally, each state has regulations on the private sale of securities.
Even though a convertible note is a "loan" at the time, it does potentially
convert into shares of a company at a later date. All these things need to be
addressed and failure to comply could be costly.

Lastly, if you do it yourself, you are risking missing something somewhere
along the line. It could be more costly to correct mistakes in the future.

The cost of an attorney up-front is much cheaper than years of headache and
costly legal fees in the future. If you are at a point where people want to
invest money in you, then do them the courtesy of at least ensuring that all
the documents are in legal order and that your accounting is handled properly.
It can be a lot harder to tell grandma that you just wasted her life savings
because you forgot to dot to sign or file a paper.

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anigbrowl
_Fred Wilson recently posted on his blog regarding standardized funding docs,
where he actually prefers them, because they make it easy to understand how
things are structured, when you enter into talks with VCs. I suspect that many
VCs appreciate this._

Yes, I would appreciate it if things were organized in a way that suited my
needs too!

I think you should consider these documents as a sort of wishlist for
investors, and bring them along to a meeting with you attorney when setting up
the company. They're not designed to exploit or mislead you, but they're not
constructed to safeguard your interests either. It would be good as an
intellectual exercise to sit down and compare the different versions, and ask
yourself why there are any differences beyond the purely cosmetic. Pretend
you're an investor instead of a entrepreneur and ask yourself again why you
might prefer one term sheet over another. Then go see a lawyer, something that
I am not.

The service a lawyer provides is to listen to your goals, needs, and ideas -
and how they differ from anyone else's, to the extent that they do - and
advise you on how different options will affect your interests. One startup
may be all about upside with investors who like risk and want to maximize
their opportunities; if you're relying on friends and family then you may be
more concerned with limiting downside risk, and its potential impact to
important personal relationships. Everyone has different reasons for starting
a business; they're often similar, but one size does not fit all any more than
one product satisfies everyone's needs.

Although there's some expense involved, consider the upside: if VCs are
publishing term sheets it means they're competing to be your capital supplier,
because of the possibility that you will enrich them. Assume they have your
interests at heart in the same way that credit card issuers do :)

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runT1ME
Great question, look forward to different answers.

