I loved Pitch Camp. Flip Flops. Free donuts and pizza. Hours of “unauthorized” advice from the angel investor, venture capital, and journalism communities. It sure beat the heck out of any legal conference I’ve ever attended.

At Pitch Camp, a fund’s partner told the crowd that he turned down a startup simply because the startup’s capital structure was ridiculous. Think several classes of stock with several valuations. Basically, the fund didn’t want to spend time chasing down all the shareholders and otherwise untangle the mess. I can’t blame them.

Keep in mind that even the best legal documents won’t get you funding. It is all about your product, your team, and your pitch. But a poorly-structured seed investment (or a series of them) can help ensure your startup company won’t get funding. Seed funding (friends & family and angels) should be conducted in a manner that will facilitate a later financing, not prevent one. And that’s even if you don’t anticipate needing venture capital.

Personally, I like the convertible note approach to a seed round. Your startup can get capital without having to deal with the valuation issue. If your startup decides to give equity in exchange for seed capital, I suggest limiting the equity investment to your startup’s common stock.

I wanted to give my initial thoughts on the Y Combinator Series AA Angel Investor Legal Documents that were officially released late last week. I plan to write a document-by-document breakdown in the coming week:

Term Sheet - August 29th
Stock Purchase Agreement - August 30th
Board Consent - August 31st
Stockholder Consent - September 1st
Amended and Restated Certificate of Incorporation - September 2nd
Investors’ Rights Agreement - September 3rd

But until then, the following are my general comments about the documents and are geared towards those readers thinking of using the Y Combinator documents on their own:

“Neutral” is all about perspective. Entrepreneurs are often worried about being taken to the cleaners by their investors. Thus neutral legal documents appeal to the startup entrepreneur. But in order for an entrepreneur to be taken to the cleaners by an investor, the investor or investor’s counsel must be sophisticated regarding these deals. That isn’t always the case. (I have experienced situations where both investor and investor’s counsel were unsophisticated about these types of financings…and no I don’t have their contact information for you.) So keep in mind that you could be giving away terms instead of getting better terms by using these documents.

Delaware corporation and not [Insert state and type of legal entity here]. There’s a reason why the documents have a Delaware corporation as the default entity. A Delaware corporation is really the only option if you want to do these types of financings and move on to venture capital. I have written a few posts about “Why Incorporate in Delaware?” and “Why a Corporation for Venture Capital?” explaining the subject. Of course, the Series AA documents aren’t for venture capital financings, but the underlying reasons for using a corporation exist in an angel round.

Read between the disclaimer’s (many) lines The lawyers at WSGR didn’t add the legal disclaimer at the top of each document just to run up Paul Graham’s legal bill. Sure, WSGR doesn’t want to get sued. But implied by WSGR not wanting to get sued is that people will take these documents and royally screw up.

And don’t think only those that do large amounts of editing to the sample documents will screw up. Legal documents must reflect the deal. You could be in a bad situation if you sell (or believe you have sold) your investor one thing and the documents reflect something different.

No legal document is dispute-proof. Don’t assume that you are immune from disputes because you used “neutral” document or “boilerplate” provisions. If I created a dispute-proof legal document, I’d be (a) the first lawyer in the history of the world to accomplish that, and therefore (b) be on my way to Boracay for a 12-month sabbatical.

And finally, I think you should take a look at this article at the Startup Company Lawyer. It is written by Yokum Taku, a partner at WSGR (the law firm that wrote the Y Combinator documents), and therefore he will have fantastic insight regarding these documents.

Next - The Y Combinator Term Sheet

I could use more palm trees here in Dallas and while I’m at it a Togo’s. However, the “City of Angels” reference in this post’s title is about bridging the gap between entrepreneurs and angel investors rather than going “Under the Bridge.”

The startup ecosystem in Dallas is discombobulated if not broken. “Underperforming” would be a kind word to describe Dallas relative to other startup communities. To improve the Dallas startup scene, Alex Muse of Big in Japan is taking action and starting an entrepreneur-angel investor group:

The basic idea is to form a group designed to a) generate LOCAL dealflow for angel investors, b) assist entrepreneurs in the creation of fundable startups and c) provide investment capital for startups. Instead of charging angels and entrepreneurs a fee to participate require that they instead invest their time.

If you are interested in helping organize this group I invite you to attend. At this time we are seeking a) angels with experience, b) angels without experience, c) entrepreneurs interested in helping and d) entrepreneurs interested in pitching. The idea is not to create an angel group in secret or without the input of entrepreneurs, but to instead create it by and for all parties.

The first meeting was last week and it went pretty well. We’re in the process of defining the vision (i.e., do we change the world or change one entrepreneur/angel at a time) and laying out the ground rules. In other words, the group realizes planning is essential to ensure an entrepreneur-angel improvement in Dallas.

From what I’ve experienced, Dallas investors are comfortable investing in real estate and oil & gas deals–but not in traditional startups. Maybe it’s because real estate and oil & gas deals tend to be structured as limited partnerships, and therefore the deal documents and language therein for startup investments might be too foreign for Dallas investors. Or maybe people in Dallas just know more about real estate and oil & gas.

Any thoughts on this from the Dallas crowd?