Don’t be creative about the wrong things

When founding a tech startup, there are certain areas where you should spend time trying to be creative/innovative. Generally these should be: product, recruiting, marketing etc. One slightly disturbing trend I’ve noticed is founders trying to creative about stuff like legal terms that really are better left in their “default” form.

Here’s my advice: hire a “default” law firm like Gunderson and take their “default” advice. Yes, you should form a C corp in Delaware of CA or wherever they tell you; yes you should have 4 year vesting with a 1 year cliff; yes founders should have vesting; yes your deal terms should be plain vanilla. Etc. These things are time tested and you are far more likely to screw things up than create value by tinkering with them. Also, they are just not what you should be spending your time on.

http://giffconstable.com giffc

one note Chris – the default advice on vesting doesn't include acceleration of vesting upon involuntary termination within 12 months of an acquisition (and IMO it should).

http://www.cdixon.org chris dixon

default gunderson advice here is double trigger for founders but not employees. i think all employees should get double trigger but i'm in the minority there.

http://giffconstable.com giffc

interesting. I'll have to rap Brian on the knuckles then, because I had to bring it up.

http://www.kartme.com/phil Phil Michaelson

Sounds a lot like the “core” vs “non core” strategy work I used to do at IBM. Anything core to your business, you should keep in house and innovate on. Anything not core, you should outsource and go plain vanilla to save time and money.

Core for a consumer-focused start-up
-marketing
-product
-cash compensation to employees/contractors
-getting cash from investors/customers

Not core for a consumer-focused start-up
-legal*
-accounting
-benefits
-hosting/email

*Legal could be core if your start-up requires lots of deals, like a roll up in a vertical

You can see some vendors i use here that help not spend time on the wrong things: http://www.kartme.com/phil/service-providers
http://twitter.com/cwren cwren

on the other hand I'm getting more and more annoyed with terms of use that overreach simply because the lawyers say they can. I find it particularly annoying when lawyers say “well everyone knows that won't stand up in a court, so it's OK”. Lawyers work for us, not the other way around. I wish more people would, not necessarily innovate law, bit at least push back on the lawyers a bit.

http://www.cdixon.org chris dixon

For terms of use, I would consider the “default” whatever some of your favorite websites have as their terms of use, not what the lawyers tell you.

I am talking here mainly about startup financing which is pretty standardized at this point.

http://twitter.com/davidfano David Fano

Would you recommend a book that hits the high notes, so we don't spend months re-reading and dealing with the same things every startup looks for?

http://www.cdixon.org chris dixon

yes, only good book i know is this which is great
http://www.amazon.com/Entrepreneurs-Guide-Busin…

http://twitter.com/davidfano David Fano

Thanks!

http://iamnotaprogrammer.com/ Colin Nederkoorn

Don't spend time on unimportant things, period. One of the other key time wasters is spending technical time setting up and maintaining non-core services – email, source repositories, project management tools. Focus on what's important and outsource everything else.
ryandavies

i agree, don't give the legal guys any power by introducing complex terms that rarely have any bearing on the deal
http://startupcfo.ca startupcfo

Have to agree with this. Don't hire cousin Joe the family practitioner. Hire a known firm in the space. Here's my checklist of the ideal startup lawyer http://www.startupcfo.ca/?p=121
http://www.victusspiritus.com/ Mark Essel

Thanks Chris. I completely agree, otherwise we'd be lawyers not founders. I have enough hats, I don't need more.
http://www.victusspiritus.com/ Mark Essel

Double trigger, get bought, get fired?

In that case vesting should or should not happen?

Just a little confused by the terminology. I suspect in that case the founder gets rapid vesting. Curious why full vesting doesn't happen at a liquidation event in general.

http://www.cdixon.org chris dixon

double trigger = company acquired and you are fired. you should get full vesting.

single trigger = company acquired. normally the acquirer wants you to stick around a while and VCs want to bake that into the terms.

http://www.victusspiritus.com/ Mark Essel

Groovy. I'm not sure why but the x2 trigger sounds like a better deal to the founder. Single trigger extends the carrot (but makes sense from an integration standpoint). I would think after liquidation it's a whole new ball game. Ownership in the old entity is gone, now you have to talk about shares in the purchasing business as “motivation”.

Of course I'm biased here.

http://www.victusspiritus.com/ Mark Essel

My comment vanished. I'll wait and see if Disqus percolates it back up.
http://pegobry.tumblr.com/ Pascal-Emmanuel Gobry

Sounds like someone who just slammed the phone on a recalcitrant investee.

http://www.cdixon.org chris dixon

no, actually, reacting mostly to blog discussions of some of these issues. feels like overoptimizing the wrong stuff.

dbv

@ chris
So totally agree. Get good attorney with startup experience and focus on building product/service.
http://www.zelkovavc.com/ Jay Levy

Completely agree here. The KISS method – Keep it Simple Stupid is very important when it comes to legal docs. As things get too complex and creative they tend to scare people away as people can't understand them.
http://neilconway.org/ Neil Conway

I think this is good advice — but I wonder, if the best course of action is the “default route”, isn't there a lower-cost alternative than hiring a name-brand legal firm and getting customized legal work done, when the end result should be 99% identical to the paperwork for every other startup?

I'm not saying you shouldn't hire a reputable firm, but I do wonder whether there's an opportunity for cost savings by avoiding redundancy.

http://www.cdixon.org chris dixon

I think firms like Gunderson will charge you pretty low rates (max 10K for financing) and even defer fees until VC financing / accept payment in equity.

http://marklogic.blogspot.com dave kellogg

I call this the “set all levers to standard” except the innovation/disruption. VCs might call it risk isolation; i.e., isolate risk to the one breakthrough you're shooting for. This is why VCs want the standard lawyers, the standard terms, the location, the standard business model (assuming disruption if technological, invert this if otherwise), and to the standard team — i.e., their incredibly strong preference for execs who've done the job before. So, agree totally.

http://twitter.com/cdixon chris dixon

nice way to put it.

http://www.metamorphblog.com Matt Mireles

Very very interesting. I have a feeling my recent blog post might have had something to do with this: http://www.metamorphblog.com/2010/02/picking-a-…

Curious: Any other blog posts you're talking about?
Saul_Lieberman

“Don't be creative” is good advice but it should not become a license to be ignorant. The “default advice” sometimes requires choosing between two or more recognized alternatives (single trigger/ double trigger acceleration). And sometimes you need to manage your lawyer.
http://technbiz.blogspot.com paramendra

Default law firm, ha! Interesting phrase.
Pingback: Don’t be creative about the wrong things | Igniting Startups - nPost
http://www.amitt.com Amitt Mahajan

The standard terms don't take founder control (special stock class with extended voting rights) or F-class shares or any of the new founder-friendly terms into account. Do you think it is worth not rocking the boat with these provisions?

http://www.cdixon.org chris dixon

i've heard mixed things on f-class shares. but if they are good my feeling is they should be moved to default, instead of doing each deal bespoke.

http://www.quick-links.net/ theoldswank

The only issue I would have with this thinking is when I turn my mind to how Google did it. Their VC financing and IPO etc were anything but standard. Getting the 2 VC firms to co fund and the dutch auction for the IPO. One could easily argue both these approaches had significant impact on the outcomes for the founders. Putting the obvious product success aside.

Chris Dixon