Open source way to help VCs and startups take care of documentation
All geared to face legal, continuing technical, and business challenges ahead
WITH the deal flows starting to gush in South-East Asia, startups and venture capitalists (VCs) are beginning to need a better and quicker way to get past the legal fundamentals.
Starting a company often requires a number of legal documents, and raising money will require even more. Incorporation documents, term sheets, vesting clauses, milestones and deliverables – all these need to be spelt out clearly and appropriately.
And it’s not just about finalising clauses and terms. Many startups have poor record-keeping, and it’s the investors who often end up having to trace and clean up the documentation, making it all even more challenging.
Law, meet computer science
Which is why startups offering legal services are starting to appear. Hong Kong-based DragonLaw, specialising in the small and medium enterprise (SME) sector but also with a value proposition for startups and VCs, has stretched its wings to Singapore [see previous story].
Singapore’s own Legalese.io has also just officially launched in the city-state. It started off as a pet project on GitHub by computer scientist Wong Meng Weng, also the cofounder of Joyful Frog Digital Incubator (JFDI.Asia), which has been running a series of successful regional accelerator programmes.
The idea came from scratching JFDI.Asia’s particular itch of putting together term sheets and investment documents, according to Wong. The process sometimes took weeks and was error-prone, requiring a warm body and active mind to drive it.
“I look at other people’s contracts and see other people’s errors and think, ‘Wow, this is an incredibly tedious and human-oriented process’,” Wong told Digital News Asia (DNA).
His background as a programmer kicked in. “I thought that if it can be automated, if it would be possible to take your data out of a database and put it into a template rather than a human copying and pasting or retyping things,” he said.
All users have to do is fill up a spreadsheet on Google Drive, download the Legalese.io add-on, and let the engine run the data pulled off the spreadsheet. The engine produces XMLs, which are saved onto the user’s Google Drive.
These XMLs can be edited or run to produce PDFs of the necessary legal documents.
“When that [running the XMLs] happens, you share the Google Drive folder with the legalese robot. The legalese robot receives a sharing request, and it reads the XMLs and spits out the PDF and deletes the folder from its own copy,” said Wong.
The software was developed inhouse for JFDI.Asia startups to use, and 10 teams have already been put through Legalese.io. It has also been made open source so that users can make improvements as and when they want.
The feedback loop
Legalese.io certainly seems to have hit a major pain point felt by VCs. “When I showed Legalese.io to Justin Hall from Golden Gate Ventures, he said, ‘This is amazing, can we use it too?’ ” Wong (pic) said.
Hall is a principal at Golden Gate Ventures, an early-stage fund based in Singapore, and also a regular DNA columnist.
That seems to have been the prevailing response with other investors, fuelling greater interest in automating the process of drafting legal documents.
“What people are really looking for is the due diligence component, while others are looking to use it to clean up companies,” Wong said.
He is acutely familiar with one of the pain points, being an angel investor himself. Angel investors are often stuck with the due diligence for startups, with little to no reward for doing it.
Legalese.io may have started off as a way to scratch a JFDI.Asia itch. The last nine months has been spent working with an entrepreneur-in-residence, and in the research process, realising the business opportunity.
“That’s when I went to register the domain and change it from Legalese.JFDI to Legalese.io,” Wong added.
Legalese.io provides more than just documents. It is a workflow.
“There are some situations where you need more than one document – typically at early-stage fundraising,” said Wong.
“You need to first clean up all of the previous stuff, and then you need to do the current round investment, which sometimes need 10-12 steps,” he added.
In such cases, filling in the blanks in such documents will be multiplied many times. Filling in a company name will jump from two to 24 times.
“Obviously you can improve the situation, so the workflows that we do are incorporation and first fundraising [seed round],” Wong said.
A lot of dedication and determination is needed to fill in a form with more than a page, which is what Legalese.io is trying to help users avoid.
“In our case, we are taking a different approach. If you are a business user, you are probably comfortable with spreadsheets, so we will give you a spreadsheet and you can fill it in at your own pace,” Wong said.
This idea of catering to the user via spreadsheets is different from the other startups offering such legal services. Most require users to fill in a form or make use of a wizard.
The feature that allows users to generate documents right from their own Google Drive stems from Wong’s own concerns on privacy and security.
“If I go to someone else’s website, and I have to fill in their forms, I worry about the security of my data – from the terms to the investor’s identity card or passport number,” he told DNA. “I would be a little uncomfortable with that.”
Securing the backend
Legalese.io currently does not store any information on its server or system. All the data resides on users’ own Google Drives. The only time data is received by the Legalese.io server is when the XML created is run.
“When that happens, you share the Google Drive folder with the legalese robot,” Wong said.
“The legalese robot receives a sharing request, and it reads the XMLs and spits out the PDF and deletes the folder from its own copy,” he reiterated.
While this may not be the best model for security, it is the best compromise Legalese.io has been able to reach so far.
Legal and technical challenges
The challenges faced by Legalese.io come from two different realms, the technical and the legal.
From the legal standpoint, due to the obfuscated language and jargon (to the layman at least) in legislation, it is not inherently clear if this is entirely legal.
The key to this lies on whether what Legalese.io provides could be considered as legal advice to its users. Section 33 of the Legal Profession Act in Singapore covers the issue of when that line is crossed.
An open source advocate, Wong believes that people should be able to conduct their own legal agreements without having to pay lawyer fees. “They should be able to get decent software to do the intelligence.”
Such blurry lines have seen some governments take action, such as in the United States with Quicken Loans (subscription required) over what is alleged to be improper mortgage documents. The Detroit-based company has filed a countersuit.
“I think we are in kind of the same situation,” said Wong. “People can go through Legalese.io and say I want to raise this much, get this much money from these people using these instruments, configured this way – and produce the legal documents.”
When DNA reached out to the Law Society of Singapore, asking it advice for startups entering this space, a spokesperson, “Be clear and truthful about the scope of services provided and be especially mindful of the Legal Profession Act, particularly Section 33 which makes it a criminal offence for any unqualified person to offer legal services.”
While the legality of charging for drafting legal documents remains murky, Legalese.io will be free for users to create and draft documents such as term sheets.
“There are classes of problems, right? There are the hard ones, and then there is everything else. This one falls into ‘everything else’,” he quipped.
Another challenge was making the product more attractive in terms of the user interface and in providing a good onboarding experience for users.
In particular, Wong hopes to attract more users through ‘endowed progress,’ comparing this to loyalty reward coupons that coffee bars like Starbucks provide.
“They give you a card, and they punch or stamp it once. You have 12 slots, and they stamp one. That’s the wrong to do it – the correct way to do it is to say I’m going to give you 12 slots, and I will pre-punch six of them,” he said.
Beyond these, Legalese.io faces all the same challenges any startup faces, from raising funding and hiring the right people, to monetising.
On the future of Legalese.io, Wong said it mostly hinges on whether funding can be secured.
“After the launch, depending on how people like it, we are at 96% probability that it is not going anywhere,” he admitted. “The thing that moves it from 96% to 90% is if we can get a bit of funding and if we get some users.”
“Getting the users is actually more important than getting the funding – first, we need to get people to use it to prove the problem-solution fit, and then we need to get people to pay for it, proving the crowd-market fit.
“This is challenging as this whole thing is going to be free, and I don’t know what people will think of this,” he added.
But there is still some wind in Legalese.io’s sails. When shown to its target demographic – investors – many indicated an interest in investing as well, and not just being customers.
Room for growth
Legalese.io is looking to get the top 100 legal documents to cover 90% of the cases.
“The universe of legal agreements is actually reasonably well bounded,” Wong said.
There are not that many documents that businesses would require in the course of its birth and operations, and Legalese.io is aiming to cover the majority of these cases, and leave the niche cases to the lawyers.
“People would still need to get the blessing of lawyers,” Wong said.
As for scaling up for businesses outside of startups and VCs, to SMEs and even lawyers, Wong is open to the idea.
“I think reasonably mature and experienced SMEs would appreciate the value of not doing things themselves, but they don’t appreciate the value of going to lawyers to do it, so they want something in between,” he said.
Legalese.io aims to reach a critical mass where users feed back into the system. This will help populate the database and provide a wider range of documents for users, according to the open source nature of the startup.
“If the agreement they are looking for isn’t in already the system, our answer will be, ‘We don’t have it, please go pay a lawyer, come back to us with what your lawyer gives you, and we will put it in the system’,” said Wong.
With Singapore as its home ground, Legalese.io is not ruling out expanding to other countries either.
“I think doing the startup in Singapore is an advantage, because we have so many lawyers in this country who are trained in so many jurisdictions.
“Our goal is not just to do it in Singapore – our goal is to do it in every jurisdiction in the world,” Wong declared.
The jury may still be out on the long-term commercial viability of legal services startups like Legalese.io and DragonLaw, but the meeting of such incumbents and disruptors will definitely make this an interesting space in the meantime.
Previous Instalment: Fledgling legal startups take flight in Singapore
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