Ironclad (YC S15) Is an Automated Legal Assistant for Companies
techcrunch.com
techcrunch.com
On the one hand, and especially touching on startup-related areas, the law can have incredible complexity. When you consider that corporate law, securities law (federal and state), tax law, contract law, employment law, and copyright law all apply in varying degrees just to do a standard corporate formation, you can imagine how many opportunities might present themselves for missteps for founders trying to guide the process themselves.
In addition, there is not merely the issue of overt error in missing legal requirements, etc. There is also the issue of omitting to make the best strategic choices from among those potentially suitable for a venture, and this means being able to stand back from one particular well-trodden path (Delaware C-corp with one class of common stock) to assess whether that path in particular is best for your venture. While many startups are well served by following the Delaware C-corp (single class of stock) path, others may not be. Believe it or not, there are some startups that are best incorporated in their own local state and not in Delaware. There are others (particularly "lifestyle" ventures, certain specialty ventures or bootstrap ventures that want to start on the cheap and convert later) that may be best served by setting up an LLC. Even in Delaware, there is the vanilla setup (and by this I mean even a savvy one like the type YC uses) and there are others using super-voting classes of stock or FF preferred or other variations. There are also fine-point decisions within a typical Delaware C-corp setup that can easily be missed. Do you axiomatically go for a cliff for founder vesting (like YC does) or do you use pro rata vesting from inception? Do you prevest some founder stock or not and, if so, in what cases? How do you handle acceleration of vesting on certain triggers occurring? How do you best deal with IP issues for various scenarios where multiple persons have worked on a venture prior to company formation? Even mundane issues such as how to handle real cash contributions sometimes made by founders without messing up the common stock price can prove troublesome if mishandled.
All that said, and on the other hand, it is true that many legal transactions today fall cleanly into well-established patterns that do not require any form of specialty legal help. While founders can and do often use law firms for such steps, it is a very legitimate question to ask, "what is the real value from the lawyers?" and "is it worth the cost?"
So you have the two sides of law: the incredibly complex and the perfectly mundane.
And here is the problem for many founders: not knowing which side of the line you are on when it comes to this or that issue in the choices you make when you form or build a venture.
Of course, when you also add the vast range of laws that apply to a venture beyond formation, the issue gets even trickier.
No one wants to spend money unnecessarily on things that don't add value commensurate with what is spent. But no one wants to make crucial legal errors either. If a big one should occur, your early-stage cost-saving efforts can quickly transmute themselves into the penny-wise/pound-foolish category.
This is where the opportunity presents itself for tools and platforms that seek to streamline and improve legal transactions and this is what I like about Ironclad's philosophical approach in particular.
The idea is not to have some end goal of replacing lawyers because that leaves founders helpless when it comes to the "incredibly complex" legal aspects of what they do in their ventures.
The goal is to streamline the process of working with lawyers while giving founders the choice to work without them, or to work with them in limited ways only, whenever they feel comfortable doing so. This keeps the founders in control of the process. Any founder who has been whisked into a legal environment where the lawyers are advising this and advising that, and are meanwhile adding a team of departmental specialists to the mix, just to handle what you might have thought a fairly basic set of issues knows the frustration of losing control in such cases. Even with the best of automated tools, that risk of losing control will never fully be eliminated, as law is indeed complex in many, many ways. But, whenever you can take that risk out for important classes of cases, you empower the founders to be much more in control than they historically have been. And that is what Ironclad seeks to do philosophically. The goal is highly commendable and should not be resisted even by lawyers. People have problems enough to deal with and no one, even lawyers, should have a stake in waste and inefficiency.
Even more, there is huge value in making legal transactions quick and efficient in their processing, whether working with a lawyer or not. If you can get your standard forms processed quickly and properly without a paper-shuffling and delays, that is a huge value in itself.
So here is hoping for elegant execution and great success. I had spoken with Jason about this back in the day when he was with Fenwick and he does indeed bring a great perspective, skill set, and passion to the task. Congrats on getting to this level and looking forward to what will follow in the execution.
I'm no lawyer, but all those questions (where to incorporate, classes of stocks to use, etc) seem like they could be codified into decision trees and similar algorithms. I can see why a human would be better at learning and exploring to know what questions to ask, but surely applying them to a particular startup is mostly routine work?
In fact, even if the lawyers are working from "instinct" and can't fully describe their process, it's just a matter of getting a good sample of existing companies (a few hundreds, perhaps, some of which not Delaware corps) and asking the lawyer to "fake advise" each one. At the end of the process, you'd have a pretty good model of that process.
1) The hard part is objective and accurately assessing the issues at hand.
I haven't done any legal work for startups, but I've done diligence on a few deals that involved a startup getting acquired or funded. I've seen several deals killed because some basic entrepreneurship issues were written off because the company thought it was no big deal.
Nobody thinks they ripped off IP from their old company. But it's done, often unintentionally, all the time.
So the decision tree would ask "Is your company using IP that you developed that is similar to your previous employer?" I can promise you that people who should answer yes, would be completely convinced that they should say no. Zuckerberg would have said no. And yet he had to pay HarvardConnect.
2) You are wasting the founders time thinking about this stuff.
But I get the impulse. Law firms take their pound of flesh. I like Sandworms comment down thread about "legal debt."
It's more of an end-to-end approach than just dealing with templates. The idea is you'd pay Ironclad $49/month rather than pay an assistant way more than that to keep you organized. Does that make sense? Would love any feedback if you think of this differently.
How does Ironclad ensure that you'll "never lose a contract again"? Can you dictate what the folder structure will be and have Ironclad follow that automatically?
Can you have it follow agreement naming conventions?
How does it handle successive iterations of a contract that is being negotiated?
Can you also store a record of emails/discussions regarding those negotiations with the contracts?
>How does Ironclad ensure that you'll "never lose a contract again"? Can you dictate what the folder structure will be and have Ironclad follow that automatically?
-Yes, you can!
>Can you have it follow agreement naming conventions?
-Yes!
>How does it handle successive iterations of a contract that is being negotiated?
-We are working on this, but there's some cool functionality built in to Dropbox already for collaboration. I'd suggest sharing the Dropbox folder that contains the doc and using those for now, they are pretty good.
>Can you also store a record of emails/discussions regarding those negotiations with the contracts?
-We're working on this, but for now you still can use Dropbox comments, etc.
Thoughts: you might have this already, but have you thought about offering discounted time with a lawyer or perhaps even group legal packages?
So to answer your question, we use Ironclad to keep our legal records in order, and we use a lawyer for legal advice.
These tools are great when things are going well. If you are a business for whom lawyers are an inconvenient expense, paperwork devoid of real value, then go ahead and download your legal advice. You'll probably be fine with boilerplate legal documents. But realize that as with the concept of 'technical debt' you might be pushing off minor expenses today in exchange for huge expenses tomorrow. That can be a valid startup strategy only IF you remain cognisant of the associated risk.
Two things could happen. First, things might hit the legal fan. Your now large business will be in need of some actual lawyering but you won't have worked with anyone. You don't want to be googling "IP lawyers in my area" the day some troll's demand letter arrives. You want someone who knows you and your business.
The far far worse option is that things don't hit the fan. You could go for years blissfully unaware of the damoclean sword over your head. But the sword never falls, the business grows, and eventually you want to take things to the next level (IPO/buyout/new investors). Then you meet your first lawyer and he or she isn't working for you. I've been that lawyer walking into a room of wannabe millionaires who think they have all their legal ducks in a row. I write a memo to my client about some gaping legal hole I've found, and the next thing you know all that money goes away. You'll probably never learn why those potential investors stopped calling.
Common big holes: Bad/fraudulent PII/PCI compliance. Improper labor practices (common when everyone is working their first real job). Poor or absent organization structure. Failure to abide applicable foreign laws. Tax fraud due to reliance on tax-filing software. Failure to properly protect IP. "Creative" accounting practices. Lack of industry-standard security measures.
And my personal favourite: Onerous contractual/financial obligations due to failure to seek adequate legal advice at time.
You absolutely raised some valid concerns. And I hope, I hope, I hope that startups aren't using these templates as-is (or possibly at all). Each company's business operations, policies, risk tolerance, etc. will be different and their standard contracts need to reflect those positions. They need to have lawyers write the agreements/policies/etc. to make sure they're following all applicable laws.
However, I think that Ironclad (and possibly others) are trying to make the administration of those contracts easier. Real trouble, from a business perspective, comes when the company gets bigger and they don't know the risk on their books because they can't manage their contracts.
I don't think these tools will cut out the lawyers, but instead help the companies manage their contracts and be able to better use us lawyers.
I do see many companies who don't know how to use lawyers. They do things like ask outside counsels to attend on-site meetings in person. Or they lie, forcing the lawyer to do things five or six times based on new information they pull out each cycle.
1. Confidence that the docs are really "ironclad"
2. Flexibility with equity options
To expand on 2. I worry that having the basic stock option grant approach as the only option just solidifies further how embedded that framework is for employees. We discuss a lot on here how the typical option agreement is rife with pitfalls and typically leaves early employees high and dry even if there is a big exit.
I would suggest adding in the alternative of an Equity Incentive Plan which sells restricted stock to employees in exchange for a promissory note held by the employer and due at exercise. It is a bit more complicated but is better overall as it requires no out of pocket expense for the employee upon purchase (or even at exercise is the company chooses) and actually gives them real shares that can't be easily written off by an acquisition or later investment. It also requires an 83b election which is something that most companies don't know about - and would be very helpful to have an automated way to walk them through it.
[1]http://www.fwlaw.com/news/8-a-practical-guide-equity-incenti...
The templates we provide can help you automatically keep your company's legal folder in pristine condition - we're not just setting you up with the template, it's the whole process layer from end-to-end.
To be clear though, we don't provide any legal advice whatsoever. We're designed to work with an attorney - so that if you need them to edit Section 2.1 of a document before it gets sent out, you can just have them hop in to the Dropbox folder and make the edits. It's the administrative layer for legal, not the advice layer.
We are designed to be able to take in any type of legal document though, including docs you already have from your attorney. So if you're not using the default templates, or you've customized them yourself, that limitation won't apply.
do you plan to offer base templates that better fit companies not following your DE/CA method of incorporation. i would venture to guess most startups don't have the capital nor legal advice to go this route. in fact my CA attorney told me to skip the DE C-Corp in the beginning.
Saying that it's a tool meant to be used by lawyers is fine, but it's going to be fairly obvious to any lawyer who thinks about it for a moment that that is basically bullshit.
The play is pretty obvious:
Phase 1: Lawyers use the service as a workflow tool.
Phase 2: The tool gets good enough to mostly not need the lawyers. They enjoy a brief period in which their income is essentially automated.
Phase 3: Companies use the service as a lawyer, lawyers only used in extraordinary circumstances.
A big part of the lawyer's value proposition is about liability/peace of mind. Like, "I'm sure this NDA is solid because if it's not I have someone to sue, the guy who wrote it, my lawyer." That's a valuable service, which is why they will stay in the picture during phase 3--essentially a liability limiting sign off.
Im sure you've thought about that, as your business model sort of hinges on having the lawyer take all the liability. Ie, the documents you provide are just "suggestions" or boilerplate for a professional to base their work off of, and those professionals are the ones who are actually liable for mistakes or oversights. It makes sense.
(Sidenote: I predict some hostility from lawyers here, similar to the hostility in the design profession over stuff like 99designs. I don't think it'll matter though. They will be hostile because they know that the tool, if it becomes widespread, would drastically reduce the number of lawyers who can work in the area, but they will each be incentivized to use the tools individually because it'll save them time in their practice as they all race for the bottom, hoping that they are one of the few left standing in the aftermath.)
Anyway, you'll have access to a very large dataset of those potential mistakes and oversights plus the tactics that work to solve them, and you'll be able to hone the tool so that they become more and more rare (this is phase 2 from above).
But the thing I wonder about is what the second order effects will be. Let's say we're in a world in which Ironclad has won, and millions of businesses use it for the legal needs.
In that world you have drastically fewer lawyers handling more clients because the work is essentially automated and they are sign signing off. Each lawyer probably still makes the same money overall since the revenue per client is much lower.
At some point something will go wrong, and the lawyer will be on the hook for having screwed up. And he'll say "Wait a minute, I'm not the one who screwed up. I used the Microsoft of legal services, the one you can't get fired for choosing, the huge goliath that lowly me could never hope to question because they have the most legal expertise in the world. I used Ironclad. They said this document was right, who am I to say otherwise? I trusted them, and they are the ones who screwed up."
And at first it won't matter. That's not how professional liability works, so that lawyer will get ground up in the gears. Maybe the scrappy ones will sue you, and you'll take your knocks, mostly winning or settling.
But I wonder if maybe when there's an army of rubber stampers who are essentially not doing anything except saying "If Ironclad screwed up this document, then I'll take the fall," then with enough case law the environment will change, and somehow Ironclad actually would be saddled with a greater proportion of the liability? Normally I imagine things like that wouldn't work because no one will fight enough to place the liability where it probably belongs, but in this case you'll be up against LAWYERS, whose profession it is to deal with and fight for/against laws. That might make a difference in the very long term.
Anyway, it'd be a good problem to have since it would mean you won like 20 years ago. Good luck guys, I think it'll be big!
I know a structural engineer whose job is to run building parameters across a special tool / model (which sometimes takes days to run), then adds a 20% padding to the values it returns and signs off the document.
Many architects, especially in my country where they're extremely badly paid and undervalued, are pressed into just signing plans with no input.