free legal advice (at least in California, for now)

And no, I don’t mean this blog, because as you know I don’t dispense legal advice here.

In any event, read about a new startup called LawPivot in an entry from the venerable TechCrunch. It’s described by TC as “a self described “Quora for legal” that allows technology companies to confidentially ask legal questions to expert attorneys.” And currently, for free. By the looks of it, seems to be limited to California for the time being. But hurry! Apparently the business model is to eventually charge both the askers and the askees for access.

TechCrunch seems to be bullish on its prospects. Myself a bit less so. I would think that one of the drivers of something like this would be to develop a critical mass of legal information or advice, much in the same way that many law firms have started developing massive indexed and searchable databases both for their internal use and sometimes for access by clients. Limiting it to one-off queries seems to limit the ability to leverage advice and to result in, to some extent, a duplication of efforts by the various lawyers seeking to impress a potential client.

But who knows. Perhaps they plan to leverage content in some other way at a later stage. Worth keeping an eye on. And of course, if you’re in Calfornia, worth giving a spin if you’re looking for some free legal advice.

standardized seed financing docs for canucks

Some of my loyal readers may recall one of my posts earlier this year about the development of standardized seed financing docs in the US, where there were, at the time, about four different sets of docs which had been developed. It pointed to a more detailed article by Brad Feld. In any event, I had asked the question whether anyone was aware of a similar initiative in Canada but didn’t hear from anyone. Was actually going to try doing it myself, but free work that you give away sometimes goes quickly to the back burner (or rather off the stove altogether) when things get busy. Least that’s my excuse.

In any event, I was very happy to hear that someone in Canada has in fact undertaken this initiative. The folks at MaRS here in Toronto, and in particular Mark Zimmerman, have apparently developed a nice set of Canadianized templates, including a term sheet (.doc) a subscription agreement (.doc), articles of amendment (.doc) and a shareholders’ agreement (.doc), with a founder’s agreement and employment agreement in the work. They already have a template independent contractor agreement (.doc).

I haven’t had a chance to look at them, but if you happen to need a set of seed round docs, and you’re here in the great white north, I’d encourage you to check them out. The folks at MaRS deserve a pat on the back for taking the initiative.

Tip o’ the fedora to Jonathan Polak for bringing this to my attention.

premature cuil punditing

I was a bit surprised to read all the hype (or anti-hype, if there is such a thing) on cuil – the new search engine that debuted just a few days ago. I read an article in the paper this morning on it, pronouncing it to be failure. Then this in Time, also declaring it not to live up to Google:

“Anybody who thought [Cuil] was this Google killer can really see now that no, that’s not going to happen today — and the likelihood is that’s not going to happen a year from now,” says Danny Sullivan, internet search guru and editor-in-chief of SearchEngineLand.

Yes, I do understand that things happen faster on all things internet, but c’mon, pronouncing them DOA in less than a week after their launch? Seriously?

Let’s do a bit of a reality check. Sure, the folks behind cuil have some great credentials – previously engineers at Google, developers of AltaVista, etc. etc. But you’re comparing a startup with a few million in VC money with the 800 lb gorilla of the internet. An 800 lb gorilla that has been around for many, many years. And which has been able to grow its revenue into the billions. And which has been able to invest huge chunks of that revenue into its technology and infrastructure.

So when people say cuil, less than a week out of the gate is no Google killer, it seems to be that the appropriate response is “Duh. Of course not.” Where was Google a week after it launched?

Anyway, perhaps it’s more of a knee-jerk reaction to what people have described as the “hype” surrounding the startup – that commentators want to be seen as not buying into it. But making such broad pronouncements so early? A little premature if you ask me.

vc monster

Saw a very interesting interview with a gentleman by the name of Rob Monster, who heads up Monster Venture Partners in the US. Mr. Monster is a well-heeled entrepreneur who has had considerable success as such. In the story, he outlines his particular investment strategy and the reasons for it:

In an interview this week, Monster said he plans to invest in about three to five companies each year in the healthcare services and online marketing sectors, with investments ranging in size from $250,000 to $1.2 million. That’s a hefty amount for an individual investor, but Monster – who has been investing since he was 12 years old and started working at the American Stock Exchange at 17 – is experimenting with a new approach he dubs “angel (investing) on steroids.”

“There is a middle ground between angel investing and venture investing and that sweet spot is woefully underserved,” said Monster.

As well as his perception of the existing VC market:

MONSTER: “Venture has earned, deservedly, a bad rap for being not forward looking in its approach to creating value in partnership with the entrepreneur. (Venture capitalists) have become short sighted … and tend to design financing structures in a way that biases toward preferences that are not aligned with the objectives of the common shareholders. And they can optimize certain outcomes in favor of the preferred shareholder, none of which, per se, is wrong. But from the standpoint of the entrepreneur they have figured it out…. Entrepreneurs are kind of backlashing a little bit… There is now an accountability for VCs to behave and to follow through on their commitments of being a partner of building a company. But a lot of times VCs get involved and say they have all of these strategic relationships and will make all of these introductions and then it doesn’t happen. This is the universal rant of most entrepreneurs that have interacted with VCs.”

MVP plans to invest through simple common shares, rather than the typical preferred shares with minimum returns and liquidation preferences, anti-dilution rights and so on. His reasons:

“Whatever happened to investing and being right there in the trenches with the fellow company builder, as opposed to baking in a preference whereby I can win and you can lose? My personal view is that the guys who back a company have a responsibility to help the company be successful.”

I recall giving a speech (an admittedly poor one to be perfectly honest) a couple of years ago about how the use of common shares seemed to be increasing as a financing vehicle for not only angel type rounds, but also early stage VC rounds. It didn’t quite ring with some of the VCs that were also presenting, so its interesting to now see a fund specifically and deliberately adopting common shares as its primary investment vehicle.

I’ve had the pleasure of some (very limited) interaction with MVP – quick, straightforward and candid. However, he’s not without his detractors (see for example some of the rather stinging comments in the above article). It will be very interesting to see how things work out.

Startup Financing Article

Interesting  article in Venture Law Lines on what usually takes too much time in startup financing deals and what is usually not given adequate attention. I’d tend to agree, particularly on one:

1. Registration rights (Some VCs still require these in early stage companies, although mercifully this is a declining trend)

I can’t recall a single instance of anyone actually invoking a demand right (or for that matter any other right) under a registration rights agreement. That being said, its primarily a US oriented document so there may be some in the US I’m not aware of (if you know of one please do let me know in the comments).

That being said, if too much time is spent on reg rights, the question still remains as to whether it should be cut out altogether, or, given the very low probability it will be exercised, whether to avoid a long drawn out debate and sign it and move on. Needless to say, these two perspectives are usually the ones that result in the discussion taking longer than it should…

The Virtues and Evils of Open Source – Part II

Found the article that triggered my previous post – was a piece written by Suzanne Dingwall Williams in her blog. The nub:

If you want to sell your own proprietary software, make sure you have a strictly enforced policy against using open source. Here’s why: even if you agree that open source has crossed the chasm in the lifecycle that is technology adoption, your investors have not. Even the inclusion of an inconsequential open source tool can cause headaches, or stop a deal altogether.

Here are the concerns often raised about open source at the due diligence stage:
– there is no meaningful warranty or indemnity for this portion of the product
– how do we know the open source license is enforceable?
– do the terms for this piece of open source contaminate the rest of your product?
– if this was inadvertently incorporated into the product, what else was?

I should emphasize that I don’t necessarily disagree with the concerns she notes. They are concerns. Particularly in the specific instance she notes – i.e. selling proprietary software (as opposed to using an open source business model). That being said whether or not the benefits will outweigh the risks will depend on many things, including the business model of the startup (even if one chooses to go the route of developing proprietary software), the license governing the open source code and of course how its used. I don’t necessarily think that companies (including startups) should just have a flat policy not to use open source. But I’ve already rambled on about this in my previous post.

But then again, I’m not a VC. And Suzie apparently used to be one. It would be interesting to know what VCs generally think. Are you a VC? If so it would be great if you could go to the poll at the bottom of the left column. Nothing super scientific, admittedly, but I’d be interested in seeing what the general sentiment is.

Venture Capital Valuations

OK I lied – just a few quick posts since its been so long and I need a break from drafting.

For all of you out there looking to value your 2.0 startups go take a look at Bubbleprice. An amazingly sophisticated set of proprietary algorithms developed by industry veterans allows you to input primary and secondary valuation factors used by those in the industry to give a precise indication of economic value. Fascinating, fascinating technology.

An example can be found below:

In fact, I’d be happy to take a half of that. Or a third. Even a tenth.

Giles Bowkett: A Tale of Two Startups

Came across this article through reddit from Giles Bowkett, an entrepreneur type in the US. Interesting in the conclusion on VCs:

The irony is, the biggest disruptive innovation that ever came from the Internet could in fact be open source software, and the old industry it destroys will probably be venture capital.Think about it. Free software and cheap infrastructure basically eliminates the whole raison d’etre for venture capitalists. Companies are cheap to start. All the stuff you used to need millions for is now free. That means venture capitalists just don’t matter any more. It isn’t about being lucky enough to get $5 million in funding; it’s about starting something with the cash in your pocket. If you make something and it’s good enough, the guys with $5 million in funding will come to you, because those guys are basically just money in search of intelligence, and it’s a lot better to be intelligence in search of money. If you’re intelligence in search of money, you’ll choose the best way to get money. The best way to get money isn’t to find some VCs to beg, borrow, or steal from; the best way to get money is to make something people will pay for. So if you’re intelligence in search of money, you’ll make stuff people want to pay for, and you won’t even bother with the VCs, because they need you more than you need them.

My own, personal take? Fat chance. Yes yes, free software is nice and so is cheap bandwidth. But the world runs on money. People cost money. Development costs money. Money money money money. So fine, you’re a super ultratalented uber-geek that shows leadership skills, blah blah blah. Still need to create the thing that people will want to pay for. And unless you’re going to be coding everything yourself, you’ll need to hire people to help you. And you’ll need to pay the accountants to pay the bills. And the lawyers to draft the agreements. And the admin guys to, uh, do the admin. Its not as if a magic sprinkle of open source will all of a sudden obviate the need to invest to build a product – if that were the case, then absence of barriers to entry would quickly reduce what was otherwise a very profitable niche into one that looks less and less desirable – both to entrepreneurs as well as investors, be they VCs or others. And even in the case of two folks setting up shop – Company A who chooses the cheap route, builds a really neat widget (but of course doesn’t have the budget for marketing, promo, etc.) vs. Company B who gets a $10 million first round, uses to ramp up and gets to market in 1/2 the time, establishes critical mass, and basically kills off Company A. Hmmm.
I also don’t agree with the “they need you more than you need them” thing – VC money, as with most things in business, are driven by the market – more VCs chasing fewer opportunities just means the cost of their money will come down, not that they will disappear.

So, long story short, I doubt tech VCs will go away any time soon. Besides, they’re fun guys.