F|R Crib Sheet: A Digital Hack to Trim Your Startup Legal Fees

When I began my career in corporate law 10 years ago, I was floored by the amount of time, money and paper consumed during the closing process of a business transaction. Every deal produces multiple sets of original documents and signature pages, so each party (and sometimes their lawyers, too) can end up with a bound volume containing a full record of everything, just for safe-keeping.

I recently worked on a financing for a young tech company that involved parties in Washington, Paris, San Francisco and Santa Clara, Calif. When the terms were finalized, I assembled the relevant documents and signatures, fed them into a scanner and sent the parties a digital PDF of the deal record. But one party decided they wanted a complete set of originals for their records. So after waiting days for more signature pages to arrive from France, we reassembled everything and physically shipped out a much thicker version in hard copy.

A financing like this one typically costs about $15,000 in legal fees. I’d estimate that the extra documentation and billable attorneys’ hours added another $1,000 to my client’s tab, for zero legal benefit.

Startups, especially those that are bootstrapping, are heavily burdened by such legal costs. The good news is that it’s getting easier, and more acceptable, to use scanned signatures for your transaction documentation. Doing this can save your startup a lot of pain – and thousands of dollars.

In 2000, Congress passed the Electronic Signatures in Global and National Commerce Act, making electronic contracts as valid as physical ones in most situations. (Checks, promissory notes and stock certificates are treated like legal tender, so originals of these are still required.)

But for a startup’s major legal transactions — licensing agreements, employment contracts, even funding rounds — there is no need to produce multiple sets of hard copy documents and original signatures, because the full weight of U.S. law applies to digital versions of both.

Some Web 2.0 startups offer tools to produce actual digital signatures (EchoSign is one), but even these aren’t necessary. The law focuses on “proof of authenticity,” meaning a copy of a manual signature need only be recognizable as the signer’s to be valid, so good old-fashioned scanning is just fine.

Scanned signatures are easier to forge than originals, so a bit more care is required to avoid fraud, but I think the cost benefits outweigh the risks. For one thing, digital documents are not only “greener” but also easier to store, archive and search, which can be handy down the road if conflicts arise concerning a legal contract.

And consider this: A funding round can easily cost your startup as much as $40,000 in legal fees. Bear in mind that in a Series A, the startup foots the bill for the company’s — and the investors’ — attorney fees. Using scanned signatures will not only reduce the administrative headaches of your deal, but also save you thousands of dollars.

Here’s a four-step remedy for avoiding the costly hassle of excessive legal fees in your next business transaction:

1) Establish an administrative custodian to be responsible for sending a final digital record of your deal document(s) to both parties.

2) Require that Party A and Party B each produce a list of signatures from its relevant officers that they scan and email to the custodian.

3) Have the custodian attach the scanned signatures to a final PDF, consisting of all the deal documents, and email the “dealbook PDF” to both parties.

4) Stop. This is the big change: No multiple hard copies; no multiple original signature pages; no FedEx charges for overnighting anything. In my scenario, each side can decide, after the fact, whether to print and maintain a hard copy for its company records.

But be warned: Old habits die hard. The ESIGN law is eight years old, yet many people still aren’t familiar with it, or just don’t recognize that the age-old signature tradition is superfluous. The next time your attorneys or an investor asks you for a set of “originals,” point out that it won’t confer any value, or security, above and beyond that of scanned copies.

Jay Parkhill serves as outsourced general counsel to startups and growth-oriented companies, and writes on legal and business matters at his blog, StartupToolbox.