In this chapter from our Transaction Management eBook, Anthony Rose, Co-founder of SeedLegals, explores how the standardisation of deal terms through the use of data will democratise the deal process.
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With a greater focus on a more digitally enabled legal sector, we will start to have better access to structured deal term data which, in turn, will enable transactional documentation to become more standardised across different sectors.
If this is the case, our approach at SeedLegals to data driven deal terms for early-stage investment rounds could be applied more widely across other transaction types.
The problem we found
Traditionally, lawyers have drafted deal documents that encompass morasses of legal wording. Owing to this, the underlying deal terms have been hidden in pages of complex jargon and created a disparity of what was market. In the case of funding rounds, not only have the cost of lawyers high, but the investors have tended to be venture capitalists and funds who work with their lawyers to send documents that are skewed highly towards the investor’s interests.
This dynamic has now shifted in favour of the founder due to the rise of crowdfunding. Crowdfunding comprises of lay investors, often with minimal knowledge of what deal terms should look like, making small investments. This has led to fewer investor consents, voting shares, little to no pre-emption, and leaves the founder to use or misuse the business as they please.
Using data driven deal terms to democratise the process
With the move towards digital platforms, there is a growing opportunity to collect large quantities of data and, critically, process, analyse and deliver insights on previous deal performances. The democratisation of this information gives greater transparency for both sides as it removes the reliance on a legal team’s experience of deals and their potential biases. On the SeedLegals platform, for example, when founders are creating a valuation and deciding their deal terms, data from hundreds of rounds we previously facilitated are used to show them what is market, importantly evidenced by the outcomes of recently completed deals.
As data is continuously generated with every activity on the platform, tech providers can provide relevant, up-to-date information to help guide negotiations and decision-making. With this, there is no need to waste time haggling over whether their deal terms are market standard, or if someone is out of line.
An initiative we are introducing is the ‘termometer’ for each deal term which displays what fraction of the time on different size rounds that deal term gets used. Instead of making a value judgment that a particular term is good or bad, the termometer exists to show what is market standard; so, if you're raising £300,000, the termometer would show that 40% of the time the investor’s consent is specified in the round. It is these new data-driven insights that are changing the ways deals are being done.
The two critical factors:
- Standardisation of documentation
While early-stage funding has undergone a certain level of standardisation already, in part driven in the UK by the requirements for SEIS and EIS (UK government tax incentives) eligibility, most legal services remain individualistic. For there to be widely applicable data driven deal terms, there needs to be further standardisation of documentation. - Access to structured data (and lots of it)
The cornerstone for data driven deal terms is having some form of structured data in the first place. As a fast-growing company, SeedLegals already has access to the deal terms of around 15% of all early-stage investments in the UK and can therefore give a good indication of what is market based on in-platform data collection. However, there is no central depositary of all the deal terms from all investment rounds openly accessible.
As we have done, it is very likely law firms and other tech providers will follow suit and start to paint a picture of what are market deal terms based on their own data and present that to end customers. This is why the developments in knowledge management platforms is a hot area.
So, is the concept of data-driven funding rounds a good or bad idea?
Data can be used as a tool to ensure a deal results in the best outcomes for all. While increasingly important, it should be considered as just one of many factors when carrying out large deals, as each transaction and each company, depending on the stage in its lifecycle, will have peculiarities specific to them. For deals, such as investment rounds, data has power in enabling parties to avoid making huge off-market mistakes and educates all involved as to what other options exist for any given deal term.
The evidence is clear: using data to drive openness and transparency by showing people what is market helps deals close faster and smoother. From what we have seen, investors appreciate that founders come up with dilution that is near market standard and valuations that they are going to expect. Founders are not asking for irrational share classes which they know investors will have to reject as they have seen that other people under similar circumstances are unlikely to choose to do that.
The days of spending hundreds of pounds an hour for lawyers to go back and forth, swinging deal terms in their client’s favour are over. Statistically, these longwinded negotiations end up exactly at market, but by unlocking the power of data, we now are able show each party what is market from the get-go, thereby facilitating a faster close. Welcome to the future.
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This is a chapter from our eBook Transaction Management: Is technology taking over the deal? You can read more insights from legal industry voices on the role technology is playing in the transaction management lifecycle in the book. Download the eBook today.
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