Let’s All Use Lego® Bricks. 

May 27, 2022  |  By

It is no secret that the venture ecosystem requires that all the participants act in concert with one another for startups to grow. Startup growth leads to innovation, better products and services for businesses and consumers, job creation, and the return of capital to investors. That capital is then reinvested and the process is recycled.

For the most part, the startup ecosystem is in harmony. The bands between startup participants are thick, tangible, and generally recognizable, even between startups in different industries or geographic regions. More specifically, many startups are using the same (or substantially similar) set of legal documents to build their corporate foundation, Safes to fund their seed rounds, and NVCA docs to guide their equity rounds. This makes it easy to conduct diligence, invest, and build. When startups veer from this process, it can complicate things.

Let me share an analogy:

Everyone is familiar with Lego® bricks. They are ubiquitous. They are incredible for several reasons but the simplest one is that they always fit. No matter the shape, size, color, or where you bought them from – they all fit together. They stack, are stable, and can be pulled apart if necessary.

This is how venture rounds are meant to be constructed. The rounds come at different times, from different sets of investors, from different locations, heck, maybe even in different currencies…but they should all fit together cleanly. I like to refer to this as my Lego® brick theory.

Venture financing rounds need to be constructed so that they can stack neatly on top of each other. Angel on top of Friends & Family, Series Seed on top of Angel, Series A on top of Series Seed, Series B on top of Series A, and so on. Investors need to understand that no startup ever exits after one or two early-stage rounds and that all rounds need to be built with the expectation that another round is coming.

Did you ever get a non-Lego® brand of bricks from that one crazy aunt who insisted that they would fit with regular Legos®? And then you tried to use them? Remember how unstable and uneven the creations were? That’s what happens when you build venture rounds with off-market docs or crazy terms. We try to stick to the Y Combinator Safes (I know there’s a lot of angst about the post-market version, but I like it when used correctly), SeriesSeed docs, Gust docs, or NVCA forms. Using off-market terms, non-compliant private equity appropriate forms, or firm-custom forms disrupt this process and add friction to future rounds, while also signaling a lack of understanding of how the ecosystem works. Startups are hard enough. Don’t over-complicate things with terms and docs that don’t fit.

Let’s all use Lego® bricks.

About the Author(s)

Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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