There may be plenty of funding for some startups these days. But plenty of companies will tell you otherwise. VC Lab, an accelerator for venture capital firms, wants to create investors who will back the rest of the world.
A basic hurdle to this goal is the standard paperwork you need to set up a new fund. It currently requires specialized lawyers whose time can cost more than $100,000 per fund formation.
Today, VC Lab is providing a set of freely available boilerplate documents intended to streamline the process, save everyone time and money and make fund governance structures more accessible.
“We have general partners launching funds from all around the world,” co-founder Adeo Ressi explains. “The last cohort enrolled venture investors from 62 different countries, including Central Asia, Africa, and every other place you can imagine.”
Legal costs are the last thing they need.
“The new managers who are getting into venture are coming in with a passion for change — the funds often have a very focused thesis, and they tend to be smaller in size. They really want to help the companies they work with to succeed at any cost. They don’t need 200 to 400 pages of legal agreements governing every small decision that they make. They need lean and light, easy-to-use agreements.”
The package, which VC Lab is calling Cornerstone, is a short 33 pages that include a term sheet, a subscription agreement and an LPA (and this user guide). Similar fund formation documents regularly run into the hundreds of pages.
“There’s been widespread recognition that fund formation docs are ridiculously complex and in need of an overhaul,” says Hans Kim, a longtime startup lawyer in Silicon Valley who co-authored the new package. “I’ve had numerous founder clients who made money and want to put their capital to good use through investing. But if they get more serious than personal angel investing, you refer them to a fund formation lawyer. Then they see the price and have to think twice.”
Improvements include a streamlined list of definitions, simplified sections on management fees and triggers for limited operator mode, according to co-author Rich Gora of Gora LLC. The current document includes details for domiciling the firm in the United States with plans for other popular locations like Canada, the Netherlands and Singapore coming soon.
As a fund formation lawyer who works with a wide variety of investors, he says the goal is to help businesspeople work out business issues in plain terms. Once the parties have talked through what they want to agree to, they can take the product to an expert like himself to finalize.
“Over the last 10 months,” he says about the writing process, “we looked at every single industry LP agreement we could find. We took concepts that would be 20 lines and distilled them into three. The concepts are there but the lawyer verbiage is gone.”
Ressi estimates that the new documents can cut legal costs in half or more, depending on factors like how many LPs you bring in. There’s also a shortage of lawyers with fund formation expertise, he notes. Providing standard documents will speed this process up and help the global venture capital ecosystem develop faster.
VC Lab was formed within the Founder Institute, a global startup accelerator that has already made similar contributions to the startup ecosystem. Nearly nine years ago it helped develop the concept of convertible equity, a precursor to the SAFE note, which removes the debt elements from convertible notes.
“We believe that all the bottlenecks need to be done away with,” Ressi says about startup investing. “Then, there will be an explosion of new VCs and new LPs all around the world who are entering the asset class. That will create a real positive change for humanity because, no matter where you are in the world, you can pursue an idea to make the world a better place and find the resources you need to make it a reality. Unfortunately, this is not true today.”
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October 16, 2021 at 06:22AM
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