1. The Anachronism of Analog Company Formation
Every year, over 5.5 million new companies are formed in the world’s major jurisdictions, and billions are spent just to maintain them.
However, companies still sit on analog rails. This affects users in 3 major ways:
The way companies are formed is still largely analog, involving form filling, filing agents (with faxes!), and clunky Government registries.
The process of incorporating companies is very much stuck in the past and largely untouched by technology.
In civil law jurisdictions, it typically involves the mediation of a notary and substantial paid-up capital mandated under the law.
In most common law countries too, the process remains heavily gated by Governments who maintain company registries and limit user access to licensed intermediaries.
This is a world that more often than not still uses Official Gazettes to announce major corporate events, or wax seals and wet signatures to authenticate documents...
Despite the high degree of standardization of available corporate structures, end users often feel uninitiated and therefore intimidated to take the step to form a company. This puts a break on entrepreneurial spontaneity.
In addition, the entire process of raising capital, from term sheet to closing, is a painful, analogue and expensive lawyer-mediated process.
It is painful as it just takes too long. Founders often find themselves in perpetual fund-raising mode, unable to focus on execution. There is no “faucet” that drips funds under the right terms, if and when required.
And whilst negotiation inevitably requires human coordination, documentation of agreed terms remains too paper-heavy and their execution too manual.
Finally, the lack of automation in the process means continued involvement from expensive lawyers.
Finally, once a company is formed, corporate actions and boardroom governance quickly cause legal entropy.
Directors have few tools to help automate routine governance. Shareholders are alienated and risk being oppressed by a lack of easy means for direct involvement.
The above pain points are particularly acute when using multiple entities or going cross-border.
INTERLUDIUM - A REAL-LIFE EXAMPLE OF LEGAL ENTROPY (OR: WHEN BUSINESS CENTERS AT HOTELS CLOSE FOR THE NIGHT)Alice wants to be closely involved with the companies she invests in.When asked, she’s also happy to take a Board seat. As a result, she sits on the Board of 3 of her total 7 portfolio companies where she is main shareholder.It always strikes her how analogue the whole boardroom process remains. Even though bylaws typically lay down a strict cascade of notifications and resolutions, which should lend itself to a high degree of automation, it seems tech hasn’t reached this space yet.The other day for instance she was required to sign a share transfer form for one of her portfolio companies in Hong Kong. Bizarrely, a wet signature was required - digital signing was not acceptable on the “Buy and Sell” note.She received an email from its CEO with the note attached as she landed late from an overnight flight.By the time she checked in to her hotel, its business centre was closed. The only way to get the form printed was to email it to the concierge.After about 20 minutes, the hardcopy of the resolution was brought up to her room. She signed it, took a pic and emailed it, but had to go down to the concierge and arrange for a RUSH Fedex document courier since the original form was required.It was well past 1 a.m. by the time she was done. By that time, people on the other side of the world arrived at their desks.Just before putting down her phone to sleep, she received an URGENT email that the resolution was not valid and had to be signed again. The lawyer (or most likely his junior) who had prepared it had made a typo in the date.Alice cursed trough her teeth, checked the hotel directory for the opening times of the Business Centre and turned off the lights.By the time she woke up and re-printed and re-signed the form (oh what fun connecting to the printer at the hotel Business Centre!), Asia had gone home.With the other main shareholder traveling too, it took a week to gather all signatures required for the share transfer to be lodged, manually, at Companies Registry in Hong Kong. All along she was copied on the increasingly desperate chaser emails reminding her of the deadline.Why this entropy from being involved with companies? Everything from how they’re formed to how they raise capital to director and shareholder involvement struck Alice as being hopelessly anachronistic.