Category Archives: Legal Tech

The Deflation of Startup Law Continues: Clerky

Almost exactly a year go, I wrote a post (The Economic Deflation of Startup Law) in which I (i) documented how the rapid adoption of technology and standardized contract language in early-stage startup law was dramatically deflating the cost of quality (crappy law has always been affordable) legal services available for founders, and (ii) made a few predictions about how this might affect the segment of the legal market that serves early-stage tech entrepreneurs.

Background

  • Contractual Changes – Standardization of contract language within law firms  & the emergence of universally standardized documents like the NVCA model docs, Series AA, and Techstars Docs, to name a few.
  • Technological Changes – Proofing software, Document Automation, Electronic Closing, etc. – reducing the amount of lawyer time required to complete a formation, bridge financing, etc.
  • Operational Changes – Technology and standardization simplify the labor input required to complete a transaction, allowing less trained, less expensive professionals to perform more of the back-end work.
  • Deal Platforms – Technology is moving from being merely a tool within the traditional law firm process to a bilateral platform that allows parties on both sides of a transaction to close, from beginning to end, with significantly less lawyer time required.
  • Freemium Startup Law – Very early-stage legal work (formations, bridge/seed financings, routine forms), once the bread-and-butter of solo lawyers and boutiques serving entrepreneurs, will no longer support those practices, no matter how efficient they try to be.  The margins will be too thin.  Those attorneys able to serve higher-quality, later-stage clients (those that make it to Series B, C, exit) where legal work will remain much more high-touch, high-margin will dominate the market and cross-subsidize their work for premium early-stage clients.  In short, Startup Law will move closer to a freemium model, where standard work is free (or almost-free) and being able to attract “premium” clients is essential for profitability.

The point of this post is not to comment on the accuracy of my predictions. One year is too short a time-frame to judge (we’ll see in 3-4 more years), though I will say that in Austin’s legal market I’ve seen a definite trend of solo and almost-solo lawyers attempting to expand their practices into multi-specialty firms, suggesting their desire (or need) to move up-market. Nationwide, I’ve also encountered a few small firms with much higher-caliber partners/associates, broad networks of specialists, and low-overhead platforms to compete head-on with BigLaw: this is where things will get very interesting.

Deflation 2.0 – Clerky

Instead, I’d like to talk about how the above developments have manifested themselves in the form of a Y-Combinator startup called Clerky. Details:

  • Founders are UPenn and Harvard (represent!) JDs of Orrick pedigree, and the head partner of Orrick’s Emerging Companies Group is an advisor; lest you question the quality of the drafting.
  • Appears to have handled formations for several Y-Combinator classes (note: classes – hundreds of companies) over the past several years; lest you think they haven’t been vetted and won’t get traction.
  • For formations, founders fill out online questionnaires very similar to those used by startup-focused law firms, and documents are automatically populated with the appropriate names, numbers, vesting schedules, etc.
  • There is a “reviewer” option where the founders can designate a person (an attorney) to review the final documents pre-execution to give a thumbs-up.
  • Execution is handled electronically on the platform.
  • Delaware filings and registered agent registrations are handled by Clerky.
  • Final executed documents are stored online.
  • Currently Available: Simple Incorporation (no equity, IP docs, etc.) – $99. Full formation (equity docs with vesting, IP assignment, bylaws, etc. – option plans and indemnification agreements coming soon) – $398.
  • Coming Soon (In Private Beta): Employee Offer Letters, Consulting Agreements, Advisor Agreements, NDAs, Convertible Notes., LLC to C-Corp Conversion

So what exactly has Clerky done? Once they get option plans and indemnification agreements up and running, they will have taken what would cost $5K-10K in legal fees at an inefficient law firm (or $2.5K-$5K at a more efficient one) and reduced it to $398 by going one step past building tools for lawyers to developing a platform that effectively replaces them – or at least ~95% of the work they do for early-stage clients. LegalZoom prices, but for premium, startup-focused documents.

What about free options?

Major law firms have attempted to address the large portion of the founder population for which even $2.5K-$5K is too high a formation price tag by offering documents online for free. I even wrote this post offering my own checklist for forming your own startup and issuing equity, lawyer-free, via publicly available documents.  But $398 is close enough to free that founders in this same category will be willing to pay for peace-of-mind, knowing that their docs are filled-out and filed properly, and that a reputable service is helping them maintain them. Plus it’ll save them hours of having to read the forms themselves.

Curmudgeon Criticism 1: Founders will want more customization than Clerky Offers

Yes, there will always be a segment of the founder population that wants high-touch, custom lawyering from the very beginning and will pay for it; just as there are people for whom Nordstrom or Macy’s isn’t good enough for their clothing and require tailors and boutiques.  But the reality is that for the large swath of the pre-funding founder population (95%+) that just wants to “get the job done” and focus on their product, Clerky, with its 80-90% discount on even the most efficient startup lawyers, will be a viable option. Those lawyers who’ve offered quality startup formations for $2.5K have themselves done so by limiting the amount of customizability and focusing on standard terms, so the difference in terms of documents between what you would get from a lawyer v. from Clerky will be very small.

Curmudgeon Criticism 2 Good lawyers will never accept a third-party service’s drafting language for their own clients.

After an inevitable phase of whining, kicking, and screaming, smart lawyers will accept whatever good clients and the market dictate, or they’ll just leave the space.  As stated above, there will always be clients who are willing to pay a premium for ensuring that all of their lawyering is 100% airtight, but those clients will be fewer and farther between.  And you can certainly expect a chorus of lawyers poking through the Clerky docs with a laundry list of ways their own documents are better. But like many disruptive innovations, it’s about the ratio of quality to cost, not absolute quality. At $398 for documents based on those used by one of the country’s leading tech firms and delivered by a YC company run by Ivy-League JDs, the value for founders is unquestionable. Quality, both in terms of legal drafting and user experience, will also improve over time.

Clerky will allow founders to engage quality, scalable lawyers earlier on.

Clerky’s “reviewer” option and its clear intent to incorporate lawyers in their processes shows that the goal here is not to completely replace lawyers, which would clearly be silly and reckless. The nuances of individual circumstances, the need for sound professional judgment that can’t be reduced to an algorithm, and the general realities of running a company will always require good, human legal counsel.

What a service like Clerky does is allow founders with very low legal budgets to stop having to settle for low-quality, mismatched lawyers who end up costing a whole lot more money (in mistakes) than founders expect. As I wrote in a previous post, a lot of founders know they need a lawyer, but can’t afford a good one, so they take the “staging” approach of going cheap up-front with plans to “upgrade” later. The consequences of this approach can be very expensive, and often disastrous.  Founders need lawyers that can serve them at all stages of development, not just when they’re tiny and the stakes seem low.

With Clerky, the “cost” of hiring a good lawyer at the very early stages of a startup can be the time it takes to quickly review some Clerky docs and answer any questions a founder might have about non-standard matters. For quality startup lawyers who stop pretending that all document drafting, no matter how routine, needs to occur in private silos, this is liberating. They can focus their practices on more complex matters that are far more profitable and interesting from a professional standpoint, while still maintaining relationships with early-stage clients who might one day require their skills. It also means the need for deferring fees will be dramatically reduced.

A missing piece: what do the documents say?

One issue that has gone under-addressed in the startup legal landscape is how to make all these automated legal documents understandable to founders.  While no founder should care to understand all the nuances of their option plan, stock purchase agreements, etc., they should at last be able to grasp at a high-level the concepts that they contain.  And sitting down with a lawyer for every explanation is and always will be too expensive for most founders.

Offering lists of books and links to founders is very helpful.  A “customer support” model of cheaper professionals without JDs who can easily answer common founder questions will also likely emerge.

One startup here in Austin is taking an interesting approach: crowdsourced annotations of contracts (Lawful.ly). They call themselves the “Rapgenius for Law.” Imagine having all of the legal forms that your startup uses available online with annotations, so you can click around the document and get plain-english explanations of what a particular provision means. That’s what they are working on, and hopefully it (or something similar) will fill a gaping hole in the early-stage startup law landscape.

For lawyers who’ve built their practices on charging clients thousands of dollars for basically filling in forms and doing some cutting-and-pasting, the future looks increasingly grim. For those of us who love working with entrepreneurs and tech companies, but find cookie-cutter legal work utterly boring and a waste of our intellect, life is getting a whole lot better.

Integrated Startup Law — Specialists Matter

Without getting bogged down on details, you can largely categorize physicians as general practitioners and specialists. Generalists are the every-day doctors that provide primary care for more routine matters, and also (hopefully) coordinate care with specialists (cardiologists, neurologists, etc.) when appropriate. Unfortunately, the U.S. healthcare system does a terrible job on that second part, but this is a blog about startup law, not healthcare. End of digression.

The practice of transactional law, including startup law, can also be categorized in this way.  A “corporate lawyer” serves the role of the general practitioner. Her job is to handle the more common matters that a client is likely to encounter, and to coordinate with specialists (tax, labor, IP, etc.) when their input is needed.

Biology is Integrated

Anyone who’s studied health policy knows that, by far, the most effective and efficient healthcare delivery models in our country — Kaiser Permanente, Mayo Clinic, etc. — are what many call “integrated.” Specialists and generalists work under the same system, and share information with one another in as frictionless of a manner as possible. The reason for this is that the human body itself is an integrated system. The heart doesn’t operate in complete isolation from the brain any more than my macbook’s hard drive operates in complete isolation from the CPU.  So it makes little sense that medical practitioners who specialize in different systems of the body work alone, as if the knowledge of other specialists is irrelevant to their own work.

Startup Law is Integrated

What I try to ensure that our clients appreciate is that the law itself, including the law that affects startups on a daily basis, is also integrated.  Even at the most standardized of startup legal events — formation — there are at least half a dozen specialties of law that play a role in the steps a client needs to take.  Securities Law, Labor Law, Intellectual Property Law, Commercial Litigation, State Corporate Governance Law, Tax Law, etc.

A view commonly heard about early-stage startup law is that it’s all become so “standardized” that large, sophisticated institutions with specialists (not just generalists) are no longer needed to properly serve clients; the end-result being a retreat to a “cottage industry” mentality where small practices of generalists have set up shops pitching themselves as delivering the same service, but without all that unnecessary “overhead.”  Some have gone so far as to call this trend a “disruption” of law practice.

My response to this perspective is three-fold:

1. “Standardized” and “Simple” are not the same thing. Not even close.

Production of the iPhone is standardized; otherwise no one would be able to afford it. But that doesn’t mean the design and building of the iPhone is “simple” in a sense that it could be produced by a fragmented cottage industry lacking the resources of Apple.  In the same sense, the set of twenty or so documents that we produce for our startup formations has become standardized to the point that we can produce it quickly at scale, but the expertise of at least half a dozen specialties went in to producing it, and is required to constantly update it and ensure it fits the current state of the law.  A set of lone generalists, even brilliant ones, simply wouldn’t cut it.

2. The exact same process, delivered from a smaller office, while wearing denim, does not a disrupter make.

Disruption of an established industry comes from delivering what consumers want, but in a radically different, often cheaper way.  Productizing the expertise of highly educated and specialized individuals and delivering it at scale so that far more people can afford it: that is disruptive – and it’s happening in startup law.  Cutting off the relevant expertise of a large portion of the profession, moving into a smaller office space, and continuing to deliver the product in the exact same way: t’is not disruptive.

Because smaller legal practices often do have salary structures that lower their labor costs, they do tend to have lower hourly rates.  But many (that I’ve encountered) use this lower labor cost as an excuse to avoid adopting the kinds of technology and practices that actually make the delivery of startup law efficient.  In other words, “our hourly rates are lower, so it’s OK if we take longer to do something.”  People operating in Big StartupLaw, particularly techies like myself, are often floored to see how backward some (not all) smaller practices are. This is not a space for “cottage” practitioners, though not all smaller practices fit that definition.

3. Specialists will need to be consulted.

Forming your startup or raising a simple seed financing might be thought of as the legal equivalent of getting a cold (simple service is fine), but actions taken at the not-that-much-later stages of the startup, like drafting executive employment agreements, developing and protecting intellectual property, issuing securities, negotiating commercial contracts to be enforced in multiple jurisdictions; these can touch on legal nuances that are a whole lot more like brain or heart surgery. Leaving everything in the hands of a generalist can end up ugly.  We’ve seen this happen many times.

The high growth nature of tech startups means they can go from playing legal tee-ball to the major leagues very quickly, unlike most kinds of businesses that utilize small firms.  Legal representation that can scale with the startup at all of its stages, rather than max out once the startup becomes successful, is extremely valuable; particularly because the costs of switching law firms are not insignificant. The key is to find a firm that packages and prices its services appropriately for each stage of a startup.

Fragmentation v. Integration

Many smaller practices are well aware of these limitations in their model and have developed informal networks of specialists from other firms to call upon in situations when their expertise is needed.  I’ve touched on this topic here.  While this is definitely a good thing, thus far I’ve been unimpressed with the mechanisms (i.e. none) that smaller practices have put in place for actually drawing upon their “network” in an effective and efficient manner.

Having to formally engage a new law firm (including running a conflicts-check) to ask a question that someone under an integrated system could get answered by walking down the hall doesn’t exactly smell like progress to me.  Even if it works for lengthy, project-based engagements, the kind of quick, 15-minute consults that are commonplace (and necessary) in an integrated firm will inevitably go under-utilized in a system with that much friction.

Some “multi-specialty” firms have done a little better and brought in-house the handful of types of specialists that are most likely to be needed by a startup: employment, tax, and IP seeming to be the most common.  But that’s a tough model to sustain because those specialists almost invariably need to also work for large non-startup clients (the kinds that don’t work with small firms) to keep their practice profitable.

Of course, as in other industries, at some point the right platform for allowing a fragmented system of specialists to coordinate ad-hoc may emerge in a way that can match the quality and breadth of the integrated system. But for now, this “PC” of startup law is nowhere to be found.  For matters beyond the absolute most basic, Apple-like integration wins.  Note, however, that a smaller footprint can actually be the optimal model for attorneys/firms with enough brand recognition (gravity) to dominate a particular niche specialty (not generalist) of the market.

Conclusion: Process efficiency and technology innovation will disrupt legal practice. A “cottage mentality” will not.

Progress and innovation in the startup law space will not come from doing things the same old way, while wearing jeans in a less fancy office space.  It will come from sophisticated parties that, instead of retreating from the web of specialties that make up the field, find smart ways to affordably package and productize their knowledge.  This process is well underway, and it’s incredibly exciting to operate in.

DIY Startup Legal Tools: Self-Diagnosis v. Self-Treatment

Image by Barbara Krawcowicz via Flickr

I have an awesome idea for a startup. Let’s call it LunaDoc. LunaDoc will be a website where you answer a series of algorithm-based questions about a health-related issue you’re dealing with, and then it will suggest to you a diagnosis. Sounds great, right? That’s probably why dozens of these exist already.

But let’s go one step further. After diagnosing you, LunaDoc will generate a prescription and send it to your pharmacy of choice, after which you can pick it up without the hassle or expense of ever having to talk with an actual physician.

If you’re half sane, you should have suddenly thought something along the lines of, “Whoa there, tiger.” Why is that? Because self-diagnosis, or educating someone enough to better understand their problem, is great. But self-treatment, or turning that new knowledge into a high-stakes action with potentially permanent consequences, without consulting a professional, can be absolutely nuts.

Sidenote: As I’ve done many times before, I’m going to leverage this healthcare example into a metaphor for the startup law context.  I truly believe there’s a lot that people in startup law can learn from the healthcare profession, so I’m going to milk this metaphor until the cows come home.

Self-Diagnosis

For years entrepreneurs have been fortunate enough to have an incredible amount of accurate, well-articulated, and free knowledge about startup law issues on the web; some in the form of blog posts and some in the form of articles. I’m a huge fan of recommending online resources to clients as a way to educate themselves without being billed hundreds of dollars an hour for it. And it makes the time that I personally spend with them more efficient (and cost-effective) because we can get right down to business without having to go through basic stuff. I keep my stash of helpful online reading here: SHL – Startup Law Links. 

Startup law blogs and articles are the legal equivalent of healthcare websites that help with self-diagnosis. Their role is simply educational, and can help a client (patient) better engage a professional in turning the diagnosis into a solution. While some doctors might complain about patients becoming “google doctors,” a more educated client base is uncontroversially a net positive.

Self-Treatment: Guided v. Unguided

Lately, however, we’re starting to see the web do what it always does: provide tools that attempt to dis-intermediate an economic relationship and let people completely handle things themselves. Self-diagnosis is evolving into self-treatment.

Major law firms have started posting standardized contracts on their websites for free.  Capography, a really cool new tool, lets entrepreneurs manage their own cap tables and even run a limited number of waterfall analyses to see how funds would flow in an exit. Docracy has emerged as an incredible source for hundreds of free contract forms for a wide variety of contexts, and they even let you execute the contract from the comfort of your own home, without ever having to go through the hassle or expense of talking with an actual lawyer (sound familiar)?

The much greater danger with these kinds of tools, much like with LunaDoc, is the issue of permanence. Education is flexible and easily correctable, but treatments are forever. Or perhaps better said, contractual and transactional mistakes are often extremely expensive to fix, if they’re fixable at all.

While everyone knows how much of a fan I am of standardization, automation, and any tool (toy) that allows attorneys to avoid repetitive, boring tasks, the fact of the matter is that tech startups are not coffee shops, and startup contracts are not wills. As I’ve mentioned before, startup law is a multi-specialty, highly contextual sport.  There are countless tax, employment law, securities law, and other state law issues that might come into play in your particular context, some of which need to be handled in the contract, and others that are completely separate from it. Signing the wrong contract, or taking the wrong legal action, isn’t that different from taking the wrong pill.  The side effects may be serious, or even lethal.

But, wait, aren’t law firms themselves putting up these standardized forms? Read the terms of service, my friend. Zero liability. Their skin isn’t in the game. Just yours. Those are marketing tools.

Attorney-Directed Self-Help

There’s a slightly different approach that a few companies are taking to allow entrepreneurs to do some things themselves and minimize their legal spend, while ensuring that a professional who understands the context is guiding the process. Brightleaf has a brilliant concept called a Leaflet. After speaking with a client and understanding what they’re trying to do, an attorney can easily turn a form into a self-help, automated tool. For example, you can turn the Company’s board-approved Option Grant form into a leaflet that allows the client to input the name, date, etc., and auto-generate option grant forms without bothering his law firm. Of course, every time you generate a form, the attorney sees it. Self-help, but with an experienced and invested professional making sure you don’t blow something up.

VCExpert’s Private Company Analysis Tool (PCAT) allows a law firm to input and update a Company’s capitalization info, and a client can then run any number of reports using that data without having to consult the attorney. Again, someone’s there making sure the inputs are correct and that things don’t go awry, but the client doesn’t have to ask his attorney to generate a different report (often hours of work) every time he wants to see the vesting status of options or the funds flow of a potential exit.

Empowering clients and unlocking information from artificial silos is awesome. Pretending that technology can completely replace professional judgment and contextual understanding when it simply can’t… not so much.

Yes, I understand that self-help tools are really about the under/un-served.

Of course, downloading a free contract form drafted by someone who at least knew what they were doing is light-years better than issuing stock with a 3-line contract written on a napkin.  And that’s why I’m not going to say that un-guided self-help tools aren’t a benefit to the startup ecosystem.

Much like how cheap, mass-market contract websites have made wills and basic corporate forms available to people who would never have contacted an attorney to begin with, I get that there’s an underserved market here that needs these tools.  Just keep in mind that how much effort and expense you’re willing to incur in protecting your startup is, in many ways, a reflection of how seriously you take its prospects.  If you’re sitting on a dud, who cares if your employment forms aren’t enforceable in your state, or if you didn’t fill out your stock issuance forms correctly? But if you think it’s a home run (and why would you waste your time on something that you think isn’t?)… well, you get the idea. Investors will too.

Why law firms should act more like medical practices.

If I try to schedule an appointment at my doctor’s office and my general practitioner or nurse practitioner (we’re assigned to both) aren’t available, either because they’re out of the office or don’t have time, guess what happens? I see someone else. If a client calls or e-mails her law firm and the partner & associate (usually assigned both as well) are either out or too busy to respond, which is often the case, guess what happens? She waits for them to become available.

Why the difference? Healthcare patients can be flexibly transitioned between different practitioners for general matters, while legal clients are generally stuck with the people they always work with, even for completely basic stuff.  You’d think that with the cost of a medical error seeming to be much higher than the cost of a legal error, reality would be reversed… but it’s not. While part of the answer has to do with professional culture and the way law firms are structured, the more practical reason has really to do with only one thing: records.

Any remotely competent medical practice maintains a thorough set of internal historical records on its patients. More importantly for purposes of this discussion, they maintain a narrow set of standardized, easily reviewable information that a physician could quickly read to understand the most critical issues that are likely to interact with whatever the patient needs addressed at the moment: prescriptions, previous medical conditions, previous procedures, family history, etc. Let’s call this an electronic health record, noting that we are talking about internal records within a practice, not the bigger problem that standards for maintaining records across practices in our healthcare system leave a lot to be desired.

Shockingly, for most law firms anything remotely resembling a well-organized, easily reviewable electronic legal record is completely absent from their business processes.  Want to know the key info about a company that needs you to quickly draft them some bridge documents? Start reviewing the documents the last guy drafted.  This is equivalent to a doctor having to review all of another physician’s dictated notes every time he’s assigned to a new patient. It’s inefficient, if not frustratingly moronic.

In our office I introduced a very simple concept that addresses this problem only for the most basic of information. We call it a Company Snapshot – a single page document that anyone assigned to a client can review in 3 minutes to know the exact name of the Company, state of incorporation,address, key contact info, who’s on the board, and a few pieces of other useful information.  It doesn’t go anywhere near addressing the fundamental problem described above, but it still prevents a fair amount of pointless document reviewing whenever a junior attorney needs to draft a simple document for a newly assigned client. One could easily imagine the concept being extended to providing a clear timeline of key events/transactions in a Company’s history, a summary of its capital structure, and notes regarding any abnormal issues that would usually throw a wrench in getting some basic legal work done (equivalent to an uncommon medical condition –mine would be having only one kidney– that any physician treating a patient needs to know about).

I don’t have the clout, at least not yet, to push anything broader in scope than the Snapshot, but I would hope that other firms are working toward a similar goal.  The lives of attorneys would be much-improved if they could optimally shift work among themselves when a single attorney is too busy to serve all of his usual clients. And clients would be better-served if, when all they need is to grant some options or issue some bridge notes, they don’t have to wait for their attorney to close that big M&A or VC deal that’s been consuming his week.  One partner in our firm described it as a shift from tribal knowledge to institutional knowledge. Whatever you want to call it, it needs to happen.

The Economic Deflation of Startup Law

News.  Two big issues have been floating around the startup law space lately. First, Yokum Taku introduced “convertible equity” in an attempt to address the potential downsides (for entrepreneurs) of convertible debt, which set off a debate that Antone Johnson spectacularly Storified. More interesting to me, however, was AngelList’s announcement that seed rounds can now be closed, soup-to-nuts, on their platform.  The real news there, for lawyers at least, is that Wilson Sonsini will close those rounds for free.  Yes, as in nothing.

Startup Law – Deflation Accelerating

Much has been written about the “deflationary economics” concerning startups and the web, with Mark Suster’s post probably being one of the best articulations that come to mind.  Not as much has been written about the indirect effects that industries experiencing economic deflation can have on other sectors they interact with.  Wilson Sonsini’s AngelList pronouncement is, in my opinion, the clearest sign that the portion of the legal sector working with technology startups is itself experiencing rapid deflation — and not because lawyers have suddenly shed their luddite tendencies and read ‘The Innovator’s Dilemma’ (though they should).

What’s happened, essentially, is that with literally every other service used by their clients becoming radically cheaper, and the resulting downsizing of investment rounds, startup lawyers simply couldn’t maintain their usual fees and keep a straight face.  This deflation started out with what you might call Stage 1 deflation, with standardized docs emerging, fixed fee packages, etc.  Startup Law was just efficient at this stage, especially compared to other areas of the law.  But with free, dynamically generated documents from high-end firms available online, and now with one of the best firms in the country saying they will close seed rounds for free, I’d say its reached Stage 2, where commoditized is the more appropriate adjective.  And I’d argue that this has some serious implications going forward.

How We Got Here

First, it’s worth reflecting on the different steps that startup law firms have been (or should be) taking in order to compete in this deflationary environment.  I’d break those steps into 3 categories: contractual, technological, and operational.  These steps could also serve as a model for other parts of the legal field that, while not as aggressively deflationary as startup law, will likely eventually follow a similar path.

Contractual. 

  • Standard Firm Docs – In order to make contract drafting more efficient, firms started modularizing the language of their own documents.  If an investor gets a 1x participating liquidation preference with a 3x cap as opposed to the 1x non-participating currently in the document, ‘drafting’ involves mostly cutting and pasting bracketed language, with minimal tinkering.  While this cut down on internal drafting, it still left room for bickering about language with the other side of the deal.
  • Universal Standard Docs – Going one step further, standardized investor docs like the Series AA and the NVCA Model docs emerged, allowing for parties on both sides to have a common language framework to work from.

Technological.

The contractual efficiencies developed in startup law still required the usual process of opening a word document, filling in blanks, moving around language in a very straight-line fashion, and then proofing to make sure everything is coherent.  Closing required creating signature packets, then tracking signatures and assembling them back into fully executed copies.  But then technology emerged to streamline a lot of this process.

  • Proofing Software – A significant amount of time on a transaction used to be spent by junior attorneys flipping through pages to make sure names are properly spelled, commas are in the right place, and defined terms are properly in place.  Software like Deal Proof emerged that can scan a document and generate a proofing list for an attorney, cutting down on that proofing time by anywhere from (my estimate) 50-75%.
  • Document Automation – Companies like Brightleaf have emerged to turn the cut-paste-and-proof process of working with form docs into one of simply clicking certain options in a form.  Want that 1x participating LP w/ 3X Cap? Just click the right box in your template, and the language will get filled-in automatically, and every other area of the document that is impacted will also be modified. No need to proof.
  • Electronic Closing.  –  With multiple parties often signing dozens of documents, the usual closing process involved creating “signature packets” where you PDF’ed the signature pages of each contract, and created single files containing all the pages that each individual party had to sign.  Without doing this, mistakes would be inevitable.  With electronic signature software like Docusign, this process is largely removed.  Put the ‘Sign Here’ tabs for each person in the appropriate places, and Docusign will (1) guide them to where they need to sign, and (2) generate fully executed documents.

Operational.

One obvious end-result of the contractual and technological developments has been that drafting simply takes a lot less time, which naturally means less money billed.  But what they’ve also done is made the drafting and closing process a lot simpler.  To modify a vesting schedule or a liquidation preference, you don’t really need to understand the actual mechanics of the language. Just click the box.  And to get a deal signed up, you don’t need to create complicated signature packets and coordinate signatures.  Just drop the Docusign tags in the right place, and it’ll do the rest.

Firms have taken advantage of this simplicity by pushing work down to junior attorneys and even paralegals, who bill a lot less per hour.  Where it might have previously required an experienced attorney to draft and close a seed financing, an innovative firm might have a paralegal do 95% of the work, with zero drop in quality.  A partner or senior attorney might spend a few minutes discussing very high-level issues with the client, but that’s it.

The Next Step: Deal Platforms

I have zero doubt that Wilson Sonsini is taking advantage of all three of the above categories.  But the key to really get the kind of deflation reflected in the free AngelList closings is the next step of legal technology: Deal Platforms.  Rather than just the initial drafting of docs being automated, with negotiation over terms and language to follow, the automation becomes bilateral.  If the investor wants a better liquidation preference, he simply fills in a field or checks a different box, and if the Company disagrees, they uncheck that box.

Contract language becomes completely secondary – commoditized – on a deal platform.  One can easily envision a time in which the negotiation of a full venture deal, not just a convertible note financing, involves nothing more than checking boxes and filling in a few fields, with full documents automatically generated and then electronically signed.  The chances of closing such a deal for free are practically zero, but all that automation could make a ~$10K legal bill for a full institutional venture capital financing a reality, which would be about a 50-80% cut on current rates.

Takehome: Nobody should be myopic enough to expect AngelList-like automation to stop at the seed deal stage.  Again, The Innovator’s Dilemma, legal version.  See below from AngelList’s Q&A.

Does Docs support Series A rounds?

No. Docs only supports seed rounds right now. (emphasis added)

Implications: Freemium Startup Law

There are a number of ways that this rapid deflation has and likely will impact the structure of startup law practices.  One result of the already-occurring deflation has been the growth of boutique firms competing with BigLaw by offering similar, albeit more limited, services at lower billable rates.  I wrote about this previously: ‘In Startup Law, Big Can Be Beautiful.

The economic advantage of a boutique practice is that firms can avoid the high billable rates necessary to sustain the breadth and overhead of large law firms, while still offering their experienced attorneys comfortable salaries.  That works well in an environment where the demand is for cheaper seed financings and venture deals. But what happens when free or practically free becomes the dominant expectation?

Cross-subsidize.  As Wilson Sonsini’s move has made absolutely clear, large firms have their own economic advantage with respect to legal fees: cross-subsidizing low-end work with profits from larger deals.  Large firms don’t just handle formations, seed financings, and venture deals, they also handle cash cow M&A and IPO transactions that are not experiencing anywhere near the kind of deflation going on at the low end.  Those deep pockets make offering free startup work a lot easier, provided enough of the loss-leaders generate big deals down the pipeline.

This model of offering a lot of stuff for free and profiting off of the high-end users should look very familiar to techies: it’s the freemium model, applied to law.  And it distinctly favors large, brand-name firms.  Boutique firms lack the institutional capacity to handle the large transactions that a larger firm can use to cross-subsidize free work.  Without more radical change, their only hope is to make up for deflation with volume.  But [insert large number] * free doesn’t pay the bills.  Commoditized deal work favors the cross-subsidization of large firms over the lower labor costs of boutique practices.

Conclusion: Move Fast, Move Up, or Move Out

At this point (when deal platforms become ubiquitous), I see smaller startup law practices having to either (A) get used to operating at much lower margins, or (B) find a way to move up-market and take a piece of the larger deals.  I wrote previously about the possibility of boutiques using technology to scale for large transactions here: The Ad-hoc Law Firm? Granted, I don’t have much visibility into how boutique practices are doing, though I’d love to hear from other attorneys or knowledgeable people on how they see the future panning out.

As for large firms operating in this space, the choice is much more straight-forward: either become radically efficient with your commoditized startup work in order to keep the pipeline flowing, or get out.  I’ve seen firms here in Austin completely exit startup work for exactly this reason.  Thankfully, we’re going with the other option.