If you want people to leave lots of comments agreeing with you, write a blog post saying that something is too expensive. And if you read the comments to Fred Wilson's latest post -- "A Challenge to Startup Lawyers" -- you'll see a whole lot of agreement. Fred argues that it should cost less than $5,000 in legal fees to close a straight forward seed transaction and asks, "[w]hat do we need to do to get there?"
Ordinarily I wouldn't jump into the fray here. What's the upside in defending attorneys? Everyone thinks that lawyers are a "transaction cost" and an impediment to getting real business done. Everyone thinks that they're getting overcharged for their legal bills. Everyone loves hating attorneys. That is, everyone but me.
So why jump in here? Because I think Fred's challenge misses the point. These "simple transactions" are the very foundation on which the companies in which we invest are built. They may involve uncontroversial terms (although, I don't think that is really true either -- look at Fred's own comment in which he objects to Ted Wang's "standard" financing docs as "missing a few things"), but they are not trivial by any means.
The contents of a company's Delaware charter will control the long-term governance of that company (and should it really be a Delaware company? a New York company? a California company? a Nevada company?). The terms of a company's "standard" stock option plan will have a huge impact upon how those shares are treated and traded (anyone who's watching what is happening with Facebook stock on the "private" secondary market today knows that something has to be done to fix these broken plans). The protection of intellectual property from day one is critical for a startup. And the failure to understand and comply with mundane tax laws can cost founders and companies millions down the road. These aren't exciting topics and they won't make a startup successful, but they are critical to the long term success of a company.
I am sure that the mere process of closing a seed financing could be achieved for less than $5,000. Fred's post essentially describes a situation in which the lawyers are merely the scribes of a pre-determined, uncontroversial and standard financing deal. In that case, the lawyers are really acting as overpaid secretarial staff -- do a search and replace for company name and send the docs off to Delaware. There's little question that a lawyer can get that done for five thousand bucks.
But even if such a simplified financing actually existed, the lawyers wouldn't be done. No two companies are alike. The founders all come from different places (did they start the company while working at another company? did they start the company at school? did they start the company alone or with a pair of megalomaniacal twins? etc.). They are all attacking different markets with different competitive landscapes and different competitors. They all rely upon marketing, business development and relationships differently. And they all have different histories (has the company been around for a day or a year or a decade?).
All of these things have a big impact upon not only how you set up your company but how much work it takes to get the company in shape. I have certainly seen some daunting legal bills when I first put money into a company, but in those cases it was not driven by wasteful attorneys, it was driven by real messes that needed to be cleaned up. If your assumption is that you are investing in a company for the long haul and are hoping to build a big and valuable business, every penny spent getting your house in order before moving forward is money well spent.
Sure, you could close an angel round for $5,000. But it would be penny wise and pound foolish. Establishing the foundation for a great company matters more than a few thousand dollars. Anyone who's worked with outstanding attorneys knows that they are more than overpaid scribes -- they are invaluable business partners. Maybe its just the former lawyer in me speaking, but I think a better challenge than getting your financing done for $5,000, would be to get your financing done right.