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Innovation in this market is a mixed bag and most of it is below the radar. There is some movement at the consumer level with very simple legal templates. At the other extreme, there is a visionary attempt to make all legal information open source, called Law.gov. We also see movement in the legal work for early stage venture financing; while this is small, it is interesting because this is a community that does not shy away from innovation. In other areas where we would expect to see progress, such as legal xml, very little is happening.

This matter to all of us. The law is “the operating system of business”. It has to work right and it has to be open and low cost.

Read on to see how we might get a better operating system for business.

(Photo: Mike Atkins/Flickr)

LegalZoom: Simple Consumer Legal Work

If this market follows the normal Web 2.0 trajectory, innovation will start with consumers and work slowly into corporate business. One venture that has got real traction in the consumer market is LegalZoom.

There are plenty of alternatives. This is a big market and consumers want a lower price. One area that has standardized is company incorporation in America using online forms. I have personally used these services and they are very effective. You still have to think clearly about what you want – LLC or Inc for example – but once you know what you want the process is simple, quick and inexpensive.

LegalZoom is not a new venture. They started in 1999 and by 2008 they were processing 1,000 documents every day. There is a good interview with Brian Liu, CEO and Founder, on TheBusinessMakers online radio show.

Disrupters are not popular with everybody and Liu describes their relationship with traditional lawyers:

“I, myself, I’m an attorney, and three of our four co-founders are attorneys, so we’ve always done everything that we could to be as straight up and by the book as possible to make sure that attorneys wouldn’t be angry. I mean, for example, one thing that we never did is we never go out of our way to say bad things about attorneys, which is-some people would do that. I mean, it’s an obvious, cheap hotshot-and it may work, but that’s not what we did.”

Neverthless when you look for complaints, you see comments like this in the online chat rooms from attorneys:

“LegalZoom is very good at marketing, but unfortunately this mass-marketing of legal ‘services’ fools people into thinking two things: 1) that they are saving money; and, 2) that they are receiving sound legal advice.

First, as far as saving money is concerned, LegalZoom, like all of these mass-marketing ‘law’ Websites, quote a low price and then nickel-and-dime customers for each ‘additional’ service or document to the point that their fees are actually as high as reasonably priced reputable attorneys. Then to add to that, the customer is not told that more work and expenses will be involved after they receive the documents (e.g. deed preparation, notary fees, recording fees, etc.). Those things would have been included in the fee a reputable attorney would have quoted. The fact is that most people who use these services end up paying as much or more than they would have by using a reasonably priced attorney.”

There are also actual consumer complaints along these lines. The reality is of course that LegalZoom is off-the-shelf and we have learned to expect made-to-measure in legal services. In those cases where made-to-measure is needed and where there is some complexity, careful use of traditional attorneys is essential.

This is where the next straw blowing in the wind is interesting.

Open Venture Funding Docs: Making The Complex Simple

When two founders register a company with a few hundred $, using an online system is natural. But what happens when you bring in external capital via Angels or VC? That is complex. You have different classes of stock and all kinds of complex provisions that can have really big consequences. LegalZoom is not the answer here.

Lawyers that specialize in this market have been helpful by deferring fees until after the funding round closes. They want to build a relationship with a company that may be very successful and require lots of legal work down the road and can afford the risk of an occasional transaction not closing.

That has been fine when Series A rounds were in the $3m to $5m range. Even $100k in legal fees is a small price to pay to get it right. But what happens when Series A rounds are more like $300k to $500k? Then both parties to the transaction want it to be quicker and cheaper.

There are many initiatives, by many different VCs, angels and incubators to simplify this process. This post on Standardized Venture Funding Documents is the best starting point to get acquainted (from the excellent Fred Wilson blog, where the comments are where really useful information comes from).

Fred Wilson was not the first to initiate this. In fact he starts by quoting Marc Andreesen, another VC (and the man who developed the first commercial browser and kicked off the Internet boom with the Netscape IPO):

“It’s like open source software. If it’s developed by IBM, there’s no reason for another company not to use it. The documents aren’t owned or controlled by Fenwick. Fenwick isn’t getting paid for them. I don’t think there’s a reason for another attorney not to use them, except if they’re concerned over reduced billings. Lawyers have a financial incentive to make things more complicated because they are paid more.”

The number of initiatives illustrates the urgency of the need. But this is like having 10 different versions of Unix. One might be better than the other but having multiple versions creates problems as this commenter on Fred Wilson’s blog points out:

“The differences between all of these are often subtle, and it’s a matter of choice of the best starting point. Any of them can save a great deal of time and money (especially in a simple angel deal) depending on what you need. Ours (TechStars) are starting to be used quite widely, and we often field questions about the differences between the various forms that are out there. Frankly, we don’t know, because we haven’t studied the others in detail. I think the reference to open source makes perfect sense, but what is missing is the simple comparison chart between the standard forms, so that one can easily choose the right starting set. Based on this idea, I’m going to ask a University of Colorado law student to consider a project to create a simplified comparison chart and see if we can’t make some more sensible progress on this. Whatever they come up with will of course be open for comment/change by the sponsors of each set of documents. Good idea?”

That is key. Lets say an entrepreneur gets 3 term sheets (which they would be wise to do) and they all use standardized legal documents but different ones? How do they compare? It would be like comparing 3 different SEC 10Q documents from 3 different companies, except worse as the formats are different. It is possible, it just takes a lot of work. In the SEC documents domain we have XBRL. Why could we not have something like that in legal docs, a legal XML standard?

Legal XML: The Dog That Did Not Bark (Yet)

Google “legal XML” and it seems like there is some activity with www.legalxml.org right at the top. One problem, there has been no activity since 2002! There is one academic in the UK, Dr. Adam Wyner, who is working on this; here is his Language Of Law On The Web .

But he seems like a lone voice. He should get a receptive audience in the UK government, which is making major moves in the Semantic Web. And on this side of the pond, Carl Malamud is an influential man who certainly understands the value of XML in the legal system.

Law.Gov: America’s Operating System.

Carl Malamud is a techie who is focused on public policy issues, as this Wikipedia entry explains:

“Carl Malamud (1959– ) is a technologist, author, and public domain advocate, currently known for his foundation public.resource.org. He was the founder of the Internet Multicasting Service. During his time with this group, he was responsible for creating the first Internet radio station[1], for putting the U.S. Securities and Exchange Commission’s EDGAR database on-line, and for creating the Internet 1996 World Exposition

An early Internet pioneer, he is the author of many early books about networking such as Analyzing Novell Networks and DEC Networks and Architectures.”

He explains the background to Law.gov in a post on OReilly Radar.

“We envision Law.Gov as a distributed, open source, authenticated registry and repository of all primary legal materials in the United States.”

This has huge disruptive implications. But this is also the kind of initiative that usually takes a long time to play out. In this case, we may see it play out faster than normal for 4 reasons:

1. This aligns perfectly with what the Obama Administration is doing with Data.gov.

2. Carl Malamud has tons of credibility, experience and contacts.

3. There is a big long-term need. His positioning of this as “America’s Operating System” is perfect. Imagine a world without Linux and the rest of the open source stack – we would have missed huge amounts of innovation and value creation.

4. There is an urgent short-term need. Companies need to lower all their bills, legal bills included, so they will back this.