Fred Wilson wrote an interesting post about reducing legal fees for venture financings. You can read it here…http://www.avc.com/a_vc/2011/05/paperless-financing-docs.html The issue goes well beyond just venture financings.
In his post, there is a link to a very interesting startup and TechCrunch Hackathon winner, Docracy. Think of it as OpenSource meets legal contracts. OpenSource software is code that has been written and is freely distributed. The process does more than make the code available for free – it improves the code. Like Wikipedia, high quality information (or software) is constantly updated, curated and refined – making the content better as the community becomes more engaged.
Now think of legal documents. They’re custom made and custom negotiated for every transaction. I’ve financed over 200 emerging growth companies in my career. Each deal involved a legal negotiation that is highly dependent the quality of opposing counsel. The better the counsel, the easier the process goes…but why do we need a custom negotiation for every deal? Why not just have OpenSource legal docs that have been vetted by a large audience? It would free entrepreneurs and lawyers to work on more interesting projects. For years, I’ve asked lawyers to give me the second draft as the first draft – meaning if we know we are going to add provisions in the context of the legal negotiation, let’s just put them in the first draft and eliminate the time and hassle of the negotiation.
SVB made an attempt at this in 1998 when they created “QuickStart.” QuickStart had very simple four page loan documents…cookie cutter style – no negotiating, at least initially. When the math was done, QuickStart was the most profitable product in the bank’s history. More to point, there were never any loan losses that resulted from using the abbreviated legal docs – not one loss. QuickStart legal documents removed some of the friction involved in bringing a client into the bank…so more clients came into the fold. Docracy isn’t ready for prime time yet. The site has yet to launch publicly. When it does, I think you’ll see routine legal documents spreading as entrepreneurs demand them. It’ll be for non-disclosure agreements and simple matters initially. Over time, more complex matters will be added…and we’ll all get more done.