Stake Ventures

Entrepreneurs, coders and activists we need you to help reboot banking

Last week I gave my talk on Agile Banking at Reboot 11. This week I have taken my talk and turned it into a series of blog articles of which this is the final one. I have links at the bottom of the article to the previous articles.

How do we build this?

Open web standards are the way to do this. A lot of great work has been done in the past couple of years.

OpenID may provide us a better alternative to account numbers. OpenId is a universal id. It replaces username/password on many different sites.

We may need guidelines for high security open id’s. A voluntary certification of trusted opened providers.

Oauth is a new web security standard. It lets all your applications talk together. You could use it to provide your accounting system access to your accounts. It could also be used for one off or subscription payments.

We also need new simple financial standards.

WideLedger is a simple financial exchange format. It contains only very basic transaction information embedded in a normal web page. It can be implemented in less than an hour for any financial web application.

Together with OAuth it makes it very easy for you to bring your financial info together. Startups will create all sorts of cool and useful financial mashups.

Finance isn’t just about reporting transaction but also performing them so we also need a very simple standard for performing a transfer from one account to another.

After that a slightly more complex standard for performing an exchange between two different parties on two different financial service providers. A simple application would to buy shares in a mutual fund with money in my electronic currency account.

We need Open Source Software to run this new generation of financial software.

Ledgers are the foundation of any financial application.
Exchange Software to manage transactions between financial services
There are lots of opportunities for hosting providers to run the above software in a secure manner.

We also need online auditing services to keep an eye on the new financial services companies but also on the hosting providers.
But what about the regulators?

They mean well but need pushing. Change has to come from the grassroots.
We need brave financial rebels, who believe it is better to ask forgiveness than permission.

This doesn’t mean being stupid (always remember what they did to Doug). Limit your risk as a rebel – think small, think community:

small community currencies
community lending
projects with a purpose

If we are forced to I say be the Christiania of finance. Force regulators to think small and learn from you.

Once you have a little bit of momentum engage them publicly. Show them it works and in the end it makes their job easier. Then scale.

Similar proposals

Most of the above ideas are refreshed versions based on work I did from 2000-2004 in the NeuClear project. However I have noticed some interesting new mainstream proposals.

Limited purpose banking a proposal by Kotlikoff and Goodman

It seems very similar but without worrying too much about barriers to entry and know your customer.

Call to action

Programmers, entrepreneurs, activists, lawyers and accountants we need you. I want to hear from anyone with an interest in this. Please write me at pelle@stakeventures.com if you have any thoughts or ideas or want to get involved.

Join the agile-banking google group or attend a BarCampBank .

Earlier this week I wrote about Risky Business the core problem in todays financial services industry, Benches, Coffee and Bubbles about the origins of financial innovation, Douglas Jackson of e-gold who has been one of the most innovative people in the financial services space and my proposal to create a new banking system.

These were all based on my Talk about Agile Banking that I gave at Reboot 11

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My proposal to create a new Banking System

Last week I gave my talk on Agile Banking at Reboot 11. This week I have taken my talk and turned it into a series of blog articles that I will post here once a day.

Simplify

We should create simple limited banks or funds. These should only be allowed to do one thing.

A fund has accounts signifying value. Value could be just about anything: Cash, gold, stocks, bonds, loans, insurance, service credits.

Ecurrency banks should replace current accounts. An Ecurrency is a non interest bearing cash mutual fund. No fractional reserve no risk. They could make money on transactions or subscriptions. They could even be implemented as a cooperative of account holders. SWIFT is a cooperative of banks, I say get rid of the middlemen.

Mutual funds fit right into this model for investments.

Loans could be handled like the Danish mortgage system. Danish mortgages are bonds issued by house owners underwritten by the Mortgage institutions. The Mortgage Institutions themselves aren’t allowed to invest in these loans to reduce risk.

In my proposed system borrowers issue bonds into the loan fund. Each loan fund specialize in specific types of loans. Borrower buys back bond to repay.

There are lots of opportunities for small startups to invent new services:

p2p lending
micro lending
community currencies
micro stock offerings

Be transparent

Offer realtime data feeds. The technology is even better for this now than when e-gold did it. We have no excuse not to. This would allow third parties to dig into our data and analyze the data, which again allows mass auditing. Problems will be found much quicker than regulators ever would be able to.

Limit

Only offer one type of service (payments, savings, loans, insurance – pick one). Limit size of accounts, limit amount of accounts.

To ensure transparency and avoid non core vested interests be focused:

NO IT department
NO customer service staff
NO branches
NO internal accounting

All of these can and should be outsourced to trusted third parties. This creates trust in a way that a small startup never would be able to do alone. Owners can’t cook the books.

You could take this to the extreme. Imagine 3 different service providers for the same payment service. They all process the same transactions. Differences can be flagged (twittered) instantly and automatically.

What about regulators?

Right now they are truly an obstacle to innovation. They go by the belief that big is safe. They make it hard for small innovators to register.

An electronic currency service needs a minimum of €350,000 minimum capital reserves in the EU. Try bootstrapping while following their rules. Banks need much higher. They just reduced this from €1,000,000 as they themselves noticed that only a couple well capitalized people had registered under the law.

A reserve is simply speaking the cash that is meant to ensure the value of your financial products to your customers.

Formula over arbitrary limits

Technology and simple math provides us a much better way

reserve = circulation

The circulation of a currency is the amount of it held by it’s users. So if we have a small bootstrapped community system of 10 accounts with an average €100 balance:

10 accounts *100 euro = €1000 reserve

This is simple, scalable and has zero barrier to entry.

Terrorists, drug dealers, tax evaders, oh my!

Are you aiding and abetting evil money launderers? Regulators say “know your customer”. You are legally obliged to verify who they are and where they live.

But how do you check id online? The most common approach for online services is to fax/scan and submit id’s. Individual countries might provide country specific approaches.

This is a huge barrier to entry. You need to worry about it as you really don’t want to end up like Doug. I believe the solution is a common sense approach:

The smaller the account, the less you need to know.

How do I know you anyway? How do I know you’re not a bad guy? How can I trust that your faxed ID isn’t fake? Your national ID number does not tell me anything. The unsaid truth about “Know Your Customer” regulation is that it is meant to protect you from regulators and not you from bad people.

Why not use social networks? Experiment with page rank like algorithms and webs of trust. It could turn out better than national id’s
One thing to remember though is

I know you!=credit

Just because I would be happy to tell facebook or my bank that I know you, doesn’t mean I want to lend you $1000. However as long as we remember this we could use it to bootstrap an alternative credit rating system.

What about risk?

We must accept but limit it. People will eventually lose money. However the design of this system firewalls the risk into certain areas.

If an ecurrency goes bust you can’t lose your money as it is held in the reserve. Government bank guarantees are no longer necessary. Bank runs are not possible as anyone who wants their money can always get it out.

Risky investments only affect their direct investors.

In tomorrows post I will cover practicalities of to implement this including ideas on technologies to use.

Earlier this week I wrote about Risky Business the core problem in todays financial services industry, Benches, Coffee and Bubbles about the origins of financial innovation and about Douglas Jackson of e-gold who has been one of the most innovative people in the financial services space.

These were all based on my Talk about Agile Banking that I gave at Reboot 11

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Lets talk about Doug

Last week I gave my talk on Agile Banking at Reboot 11. This week I have taken my talk and turned it into a series of blog articles that I will post here once a day.

Douglas Jackson was an oncologist from Melbourne, Florida. He was an idealist and thought the world would be a better place with a strong private currency away from the control of any government. So he created e-gold back in 1995.

E-gold is an electronic currency backed by real gold bars. Some people use it to invest in gold, but more commonly it was used like a regular currency to make and accept payments.

Doug was a true innovator. E-Gold created an easy to use API before PayPal allowing all sorts of small businesses around the to accept payments. At this time it was very hard for small businesses to get merchant accounts. E-Gold provided a real solution to this.

They let their users audit them

How much gold is in the system?

Where is the gold physically located?

What are serial numbers , exact weight and brand of individual gold bars

Real time usage statistics showing amount of transactions, transactions by size and statistics about account sizes

The e-gold mailing list kept them honest. People were analyzing the stats, theorizing and asking explanations from E-Gold staff for any thing out of the ordinary. Like this 10% drop in gold from the balance sheet in October 2001, where SnowDog performed analysis of why this was happening:

There are 11,161 accounts in the E-Gold system with over 10 grams of e-gold, (about $90 US in e-gold). This is almost the same number that E-Gold has supported for the past 6 months. So, it appears that most of the people with any significant balances are NOT selling their e-gold. The 10% drop in gold, in the past month, seems to be due to gold sales from small-balance accounts. E-Gold mini run

The community started creating tools to scrape and analyze e-gold

Craig Spencers E-gold revenue calculator

This was a mashup of the data on the above mentioned statistics page and their published fee structure. Note the sharp dip in 2007 (we will come to that soon)

Trust the system hate the man

Then Doug started acting like a bit of a bastard. Started suing several very nice people who were well known in the community. The mailing lists went berserk, Doug was called all sorts of names (very few of them good) and an alternative mailing list was set up in case E-Gold started censoring their own list.

Yet a funny thing happened. People continued to use e-gold. As a matter of fact the use grew and grew until at its peak there were $85 million dollars worth of e-gold in circulation. Not bad for a single activist entrepreneur from Melbourne, Florida.

Black helicopters

In 2007 the US government caught up with Doug. He was arrested and last year received a guilty verdict for “conspiracy to commit money laundering”. Doug was not performing “know your customer” a legal requirement in most countries that financial services institutions check the identity of their customers.

People are still kind of using e-gold. People are buying and selling black market auctions on their balances.

For more background on E-Gold check my article How the man finally brought e-gold down as well as Wired’s article Bullion and Bandits: The Improbable Rise and Fall of E-Gold.

In tomorrows post I will cover specific steps I think we could take as small entrepreneurs to innovate banking.

Earlier this week I wrote about Risky Business the core problem in todays financial services industry and Benches, Coffee and Bubbles about the origins of financial innovation.

These were all based on my Talk about Agile Banking that I gave at Reboot 11

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Benches, Coffee and Bubbles - The origins of Agile Banking

Last week I gave my talk on Agile Banking at Reboot 11

This week I have taken my talk and turned it into a series of blog articles that I will post here once a day.

In the beginning was the bench. The word Bank comes from the Italian word for bench “Banca”.

Rather than a modern bench these were more like the above modern lottery stalls in Panama and were manned by money exchangers found in markets going back to roman times. By the middle ages the Banca’s in Italian trading centers like Venice and Genoa were not just exchanging money, but also lending and storing money to local traders, whom they probably new very well.

Genoa is famous today as the home of pesto. Very delicious indeed. However they were also home to the first modern company.

These always had a limited purpose, so investors like individual traders and Banca’s would know exactly what they were investing in. Such as conquering and taxing the Greek island of Chios:

Nowadays companies more than often attempt to be general purpose. Most normal company founding documents say something like “This company may perform any legal business”. Bank companies generally do have some limits and say something like “This company may perform banking business”, which really could encompass just about anything.

The above people are the kind of web 2.0 hipster you will find in San Francisco’s Blue Bottle Coffee everyday. If you follow anyone from San Francisco on Twitter, you have no doubt heard tweets like “Heading down to Blue Bottle for Coffee” or “Just bumped into at Blue Bottle”. Besides really good coffee it has become kind of a real world alternative to Twitter. Kind of like Jonathan’s…

These people were the hipsters of their time. They are seen here at Jonathan’s Coffee House. Jonathan’s was one of many popular Coffee Houses in the City of London in the late 1600’s and early 1700s. These places were where all the smart (and not so smart) business people hung out all day long. Drinking coffee, gossiping and most important buying and selling shares in the cool companies of their time. I don’t know if he was bored or what, but this guy John Castaing started to keep a list of trades happening during the day in what may be one of the worlds first mash-ups.

Jonathan’s and John’s list became what is now the London Stock Exchange.
In reality none of our financial institutions and instruments were thought up by think tanks, university professors or government employees. Rather smart entrepreneurs thought up solutions to the problems of the day.

Yet there were problems…

Many people think bubbles as being modern. We remember the dot com bubble and are now living in the immediate effects of the housing bubble. But really they have been around for many centuries. One of the coolest things about these early bubbles was that they were always documented by really cool cartoons.

Tulip mania hit the Netherlands and over a couple of months the whole country had gone tulip mad. Everyone The price of tulip bulbs started shooting up in November of 1636. Right before the bubble popped the following february, the price had risen 20 times.

“Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clotheswomen, dabbled in tulips.” MacKay

The South Sea Company was a really cool British company founded in 1711. They had the official monopoly for trade with Latin America. The stock price grew to crazy levels (no doubt people were drinking lots of Coffee at Jonathan’s) when at last the bubble burst. Spain was at war with UK and the Latin American trade dwindled. This became known as the South Sea Bubble and was probably the first time the word Bubble was used to describe such an event.

John Law) was a very slick Scottish guy. Maybe the Bernie Madoff of his time. John was an ardent gambler and escaped a death sentence in Scotland after killing a guy in a duel. Somehow John, who obviously was a talented salesman, managed to become the treasurer of France. During this time he created his own private bank and pioneered the creation of Paper Money. The bank bought the Mississippi company, who’s job was to colonize and trade with French Louisiana in modern day US.

John then proceeded to convince the king to make his bank the Banque Royale endorsing all his paper money with a royal guarantee. At the same time he started a strong marketing campaign selling Mississippi Company shares.

People of all classes went crazy and the bubble was created. In 1720 when people realized that Louisiana wasn’t quite the Eldorado he said it was the bubble burst and the king was left printing worthless money to solve crisis. John himself escaped France and spent the rest of his life gambling in Rome, Copenhagen and Venice.

Why this history?

Innovation starts with people, it starts small, it starts limited. Bad stuff still happens.

In tomorrows post I will cover e-gold and how it relates to my idea of Agile Banking. Yesterday I wrote about Risky Business the core problem in todays financial services industry.

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Risky Business

Last week I gave my talk on Agile Banking at Reboot 11. This week I have taken my talk and turned it into a series of blog articles that I will post here once a day.

The world is in serious trouble. Recession is hitting most parts of the world. While many people debate the exact reasons for it, most agree that the reason it has grown to the current extent is due to structural problems with our banks. We have become too reliant on them and they have grown so intermingled that our politicians believe they are too big to fail.

While we can talk about all kinds of things, such as sub prime mortgages, monetary policies etc. etc. The real problem is one of risk.

Risk is not a number

Imagine you going to a horse race to bet on a horse that is such a sure bet that it is only 1/10 chance that it will lose. The horse is faster than all the others, has a great jockey, you are set to win. You take out all your cash, take out all the money from your credit cards and remortgage your house to make a huge bet. After all there is no way you can lose. You make the bet and 10 meters before the finish line the horse falls. Against all odds you have lost all your money and are now in incredible debt.

This is essentially what has happened to the worlds financial system. It is irrelevant (but interesting) to discuss why the horse fell. The real issue is the lack of understanding of risk that made you put all on that one horse.

The banks of the world all went together and borrowed all of our money and all at the same time made the same really, really safe bet. After all it was a sure thing. The only problem was that the impossible happened and now everyone is trying to hide from the bookmaker.

Banks like most other people don’t understand risk. In many cases Banks don’t even understand themselves. Most very large banks have no clue of their own liquidity (how much cash they have) at any given time.

Imagine if you started writing checks like crazy without really having an idea how much money you have in your checking account. Banks frown on it if you do it, but they themselves are for the most sake guilty of this.

Because of this you get situations where you have one risky trade and they’re gone. We have seen this before with individual banks, however this time all of them made the same bet and most of them are in serious trouble.

Traders love risk numbers. What I mean by risk numbers is a number generated by some magic formula that condenses certain factors about an investment. This makes it easy for them to compare how risky an investment is.

Regulators also love risk numbers. It makes it easy for them to regulate the banks. They can specify what risk formula their banks should use and then look at a spreadsheet and see quarterly risk numbers for each bank. If a banks risk number is too high, they can send scary letters to the banks saying you need to take less risks.

The Black Swan

The only problem is what Nassim Taleb calls the Black Swan. Before the discovery of Australia Europeans thought there was no such thing as a black swan, it was impossible. Yet they were in for a surprise when they discovered it in the land of the Koala.

In other words the improbable will happen. The Black Swan is an unforeseeable event, that nevertheless happened. If you can’t imagine something happening you can’t calculate the possibility of it happening, thus any particular risk number can never take a black swan in to account.

Nassim states that Black Swan’s happen all the time. Sometimes they’re good, sometimes they’re bad. Yet in most cases they have had much larger influence on the world than anything we ever planned for or predicted.
The current financial crisis could not be seen in the analysts risk numbers. Yet it happened and the banks were not ready.

Risk numbers are good for black jack and other casino games, where all different outcomes can be calculated. But they can never be trusted if you can’t 100% guarantee you have taken into account all outcomes.

Outside the casino there are very few areas where you can calculate all outcomes, thus they are useless in the real world.

In short “shit happens”.

For more on the Black Swan check out these quite entertaining two podcast interviews with Nassim:

Any fix to the banking system must accept this. Risk can be managed through limits and real diversity, but not by relying on a single number or forumla.

So, who is going to fix our banking system?

You would think the banks would like to fix themselves. They might but most are too big to fix. I am willing to bet they even know this themselves. The only way save them without huge fundamental changes is through some sort of artificial protection.

Who will protect them? The same people who are meant to keep them under control of course, the regulators. The regulators are the government agencies looking after the banks. In the US the FDIC and Federal Reserve. Every country has one or more government regulators.

So far the regulators have been very busy. They’ve given us lots of words, spent lots of our money and not made any real changes.

The problem is that regulators are not innovators. Their solution? Besides limiting the bonuses of high level bank employees, which has absolutely nothing todo with any of the causes of the current crisis, their gut instinct is to regulate harder.

They raise limits and increase reporting requirements. In reality they are not physically capable at the moment of doing anything but raising limita and telling people off after the fact.

What this actually does is that it raises the barriers of entry for new banks or banks trying to innovate. Large established banks can easily afford to pay themselves out of this by building up larger compliance departments. Regulators think this makes their job easier and it also allows them to say to the public that they are getting tough on banks.

What we really need is innovation. The system is broken and we need to think differently. We as entrepreneurs are stuck with the job. Innovation can only come from small startups and activists. These are the only ones without vested interests in keeping the system the way it is. But as I mentioned the regulators make it very hard to innovate in banking.

I have a plan!!!

Where in we go back to basics, but lets rewind things a bit first.

In tomorrows post I will cover some history.

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Agile Banking Talk

I gave my talk earlier today at Reboot 11 about refactoring the banking system:

Agile Banking

View more documents from pelleb.

I realize it’s not the same without me talking through it, but it was video taped, I will post the video when available. They also made me promise to do a write up about it for the Reboot book.

Anyway I’m interested in any comments.

Read my 5 part blog series based on this presenation here

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Contenture - A different take on Micropayments

As many of you know I have long been interested in and working with payment systems.

I have never been too much of a fan of most micropayment systems, so when Contenture (the links to them are affiliate links) launched yesterday I was pretty sceptical. Reading their documentation changed my mind a bit and I have now implemented it here on this blog as an experiment.

From a users standpoint he pays a given monthly amount to contenture. This can be as little as $5.95. This is then split on a monthly basis amongst sites using Contenture.

From a users point of view this is kind of similar to other micropayment systems such as Ron Rivest’s ingenious yet failed Peppercoin (PS) system. Contenture is much simpler though, dropping the rigidity in return for ease of user and thus hopefully actual users.

From a site owners perspective Contenture works a bit like google ads in that you place a snippet of javascript on your site. The contenture servers register the amount of pageviews by contenture users on your site and pay you out proportionally your share of the users monthly subscription fee.

So how do you limit non paying members? Well the beauty is you don’t have to and I’m not. It can be purely on the honors system. Signing up as a user for Contenture allows you to budget exactly how much you want to pay on a monthly basis to your frequently read blogs to keep them posting, without having to worry about signing up for each one.

It does allow you to enable or disable parts of the page to paying members through a very simple javascript api. So you could disable ads (which is what I’m doing) or only allow comments to paying users. There are quite a lot of possibilities to experiment with. However I think just doing it on the honor system and disabling advertising should be fine for most bloggers.

Can this system be gamed? Oh yes, do I care. Not at all. People can already install ad blockers etc, so really who cares.

What I would like to see is a bit more information about who they are. Whois tells me they are in Portland, Oregon. According to CrunchBase one of the Co Founders is Alex Wilhelm who’s based out of Chicago.

This kind of stuff should be easily available, at least to provide some basic level of trust in a payment system. I’m sure it’s just an oversite, but I think they should have an About Us page. (Come to think of it so should we at Agree2 ). My investment in using them is fairly small right now, but if it grows I’d certainly like to know more.

Who should look at Contenture? Bloggers definitely. I’d say probably it would be a good alternative payment method for small microsites like all the little twitter web apps that are out there as well. These could easily enable/disable simple features for paying users.

What has been the biggest problem with micropayment systems so far? I believe they have been too strict. The hassle doesn’t seem worth it to the users.

Contenture allows you to mix this up a bit. It’s ok if people don’t pay, lets make it easy for those who want to support you and not treat those who don’t like 2nd class citizens.

So why don’t you try Signing up for Contenture either as a user, blogger or to see if it might work on your own site. It will take you a few minutes to add it to your blog and maybe half an hour on a smaller web application. I am not affiliated with them (besides being a member site with affiliate links of course), but I am pushing them as I do like to see innovation in a field that hasn’t seen innovation since PayPal more than 10 years ago.

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A lawyer responds to "What Lawyers could Learn from Programmers"

A couple of months back I wrote this article What Lawyers could Learn from Programmers. It was meant to be provocative and I had hoped for better responses from the law community itself.

Well now George Grellas wrote a huge fantastic comment to the original post outlining the issues as seen from the eyes of a lawyer. I’d like to really thank George for taking the time. His comments are very good and to ensure that more entrepreneurs see them, I’m reposting it as a full blog post here:

I have been a startup business lawyer in Silicon Valley for over 25 years.
I agree with your broad points that lawyer monopolies are a hindrance to good legal services and that things in law that can be commoditized can and should be for the benefit of consumers.

Six or seven decades ago, lawyers were paid to do title searches when a home was sold. Who would want to pay a lawyer to do that today whatever that lawyer’s real property expertise when title companies do that job cheaply and well.

So too simple incorporations and LLC formations can and should be done through inexpensive online services for many small businesses.

Other areas lend themselves to this as well. And more power to those who set up such systems for the benefit of consumers. They are performing a public service.

Remember, though, that law is a slippery beast.

David Dudley Field inspired adoption of the California Field Codes in 1872 with the express purpose of using ultra-simple language to permit lay understanding of the law. The theory was to take the law away from esoteric judicial rulings as much as possible and put it in “simple” statutes that anyone could read and understand. As any California lawyer can tell you today, judges and lawyers wound up “interpreting” those simple statues to the point where all the old complexity reasserted itself with the added kicker that the new statues themselves added yet another layer of complexity to the process (the question being not just what judges meant in all their old rulings but what the legislature meant in adopting the statutes themselves). This produced a whole new set of rulings that was more complex than ever, making California’s laws some of the most complex in the whole nation!

Law, therefore, in trying to capture and regulate the whole range of complex affairs, doesn’t easily lend itself to simplicity and standardization. Elements of it do, of course, but as a whole it does not. Therefore, any attempt to reduce it to simplicity must be approached with circumspection.

I personally think Nolo does a fabulous job with its self-help resources of helping consumers take some measure of control of their legal matters.

Yet, when the process is unguided, it can lead to problems.

I attempt to present the other side of this on my website in a couple of answers to FAQs. Why can’t I just use a form contract? ; What are the distinctive aspects of setting up a startup business?.

The latter item illustrates some common pitfalls in parties attempting to incorporate themselves when setting up a startup. Many will fill in their kits and follow instructions. But then they issue stock without restrictions, leaving themselves vulnerable to founders who take large amounts of stock and then walk away from the company. They fail to put the IP into their startup. They combine the “cheap stock” issuances with simultaneous investor dollar contributions in ways that create serious tax problems. These are all serious errors in forming a typical startup. Yet, when founders use kits, they have no idea about these issues. Does this matter? Sometimes not – they just fix the problems later. But often it does lead to real problems. And fixing the problems later is much more costly than doing it right in the first place.

Could the startup process (i.e., involving a team of founders with a tech business model) be systematized much more than it is today? Yes, it can. Can it be handled through online incorporation services who do nothing more than supply kits? Not even close.

When it comes to standard forms, these are useful and every attorney uses templates. But it is very wrong to assume that the process of doing contracts reduces itself to simply filling in blanks. The worst lawyers I ever hired tried to do that and little more (using my firm’s otherwise well-drafted forms) and their work always proved a disaster – I would essentially never let it out the door. Indeed, if I see a situation where a very simple form will solve a client’s needs, I always tell the client it is a waste of time to pay for attorney time for that purpose. But in almost every transaction of note the issues are almost never that simple.

Someone with a discerning eye almost always needs to review custom contracts carefully. This, of course, can be a smart lay person using self-help resources. And some people are inclined to invest time and effort for that purpose in a way that helps them manage their legal budgets more carefully because they pick up a lot of the burden themselves. But it is a burden, and it has a cost attached to it – there is always a cost-benefit component to any such effort. What is worse, many people do not do a good job of thinking through the issues and wind up cutting corners. A contract in their hands can be like a loaded gun in the hands of a six-year old – wildly unpredictable and sometimes dangerous results can follow.

Your point about lawyers’ FUD is dead on. This is a despicable practice. I have spent a long career, though, working directly with thousands of entrepreneurs – smart people who see right through anything that is phony. I always use a direct style with such clients – telling them straight how the law works, how they can manage it, and when they need something more custom. Even with this approach, there is no more than maybe 15-20% of the business law matters I handle that lend themselves to commodity handling.

One further illustration: take standard Series A funding documents drafted by national venture capital associations. These are expertly drafted and very standardized. They can be used in a fill-in-the-blank fashion. And they work beautifully. From a founders’ standpoint, however, such documents seriously distort the picture. They are in “standard” form only because they fit the pattern that VCs like. Many of the provisions in those documents can and should be resisted by founders because they can be seriously harmful to founder interests (even the idea of a reflexive incorporation in Delaware can wind up prejudicing founders). Moreover, many Series A fundings can be done with documentation that is far simpler than that found in the “standard” forms – simpler and highly favorable to founders (we use such documentation all the time when our founding teams go for angel funding, etc.).

Indeed, many “standard” contracts are prepared by interested parties who have a direct stake in slanting them in one direction only. Ever read a 50-page “standard” commercial office lease – beautifully drafted, needing only a few blanks filled in. Yet any tenant who signs such a lease without customizing it will agree to many onerous provisions that commercial landlords have built into such documents.

“Standard” contracts for the sale of a small business, in turn, are prepared by broker organizations whose main motive is to make sure a deal closes and does not have too many complications. Such documents are very professional and very easy to use – again, just fill in a few blanks. But any buyer who uses such forms in buying a business of any significance whatever will easily wind up losing the vast majority of protections (especially relating to warranties) that go into any custom contract to buy a business. Again, I try to educate consumers about these issues on my website, using not FUD but a reasoned explanation of what the issues are and where the risks lie.

I hope you don’t interpret my comments as critical or self-serving. They are not meant to be. The issues you raise are important ones and your discussion of them is very helpful. But any such discussion has to take realistic account of the true complexity of legal issues and of the limitations of standard forms and procedures.

Lawyer monopolies need to be limited or even abolished. Law needs to be made more consumer-friendly. Standardization needs to occur as much as possible. But skilled handling of the law and its complex aspects will never reduce itself to simple forms or procedures. Any balanced discussion of this topic needs to take that into account. Legal complexity cannot simply be wished away, no matter how gifted the people trying to program the standard algorithms (to borrow the programming analogy). And the motives of interested parties who stand to gain from such standardization cannot be ignored.

Sorry for burying what amounts to a 1,500 word piece within the scope of comment. Please accept this in the spirit of my validating the importance of the issues you raise and wanting to further that debate by taking all important factors into account.

Please visit George’s firms website as it really seems to be a fountain of knowledge for small business and early stage startups.

My main comment is that this is exactly what we as startups wish for from our lawyers. A sparing partner, who understands our needs and is able to explain the issues that most of us non lawyers don’t instinctively understand.

Most entrepreneurs I know complain about the lack of transparency, the FUD and all the things I complain about in the original article.

George Grellas associates seem very transparent. Even their billing practices page page would make me feel more confident about making that initial phone call. Maybe us programmers could even learn from that as we often end up being not too transparent in that end.

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Moved to Miami

We’ve just moved to Miami, well Miami Beach, FL. I arrived back in the US (San Francisco) about 2 years ago and it was time to try something new again. So we drove here from San Francisco and saw (and tasted) a lot of this great country.

Why Miami? I’ve been asked this a lot. While Miami is extremely popular with in particular Europeans and Latin Americans, it does seems to have quite a bad reputation amongst most American’s. I don’t know if it’s Miami Vice or just that “Anglo’s” are the minority here?

Weather

Better weather for my taste. I like the tropics and heat. Winters here are even a tad too cold for me. I know people love the Bay Area weather, but it’s just too cold for me most of the year.

Housing

Miami has been hit by the housing crisis, which sucks if you own here, but as a renter this is brilliant. Apartments that would easily cost $4000/m in downtown SF go for $1500/m in down town Miami. With much better views to boot. You can also find plenty of apartments in that price range in Miami Beach just without an ocean view. Expect to pay $500-1000 more for that. Miami Beach is a great walkable town that actually reminds me a bit of a Palo Alto that never sleeps with an amazing beach and tons of great restaurants and clubs.

I have long been pushing the idea of bootstrapping globally by which I mean founding your startup in a place with low cost of living. Miami currently allows you to do just that while staying within the US. OK it’s not quite as cheap as Argentina, but housing in Panama is more expensive than Miami now (other costs are still cheaper).

Culture

I really like the Latin American influence – from Cuban Ropa Vieja to Colombian night clubs, the only place that comes close in the world as true Latin American melting pot is Panama.

The west coast also has a large Latin American community, but it’s pretty much a mono culture, with 90+% being from 2-3 northern Mexican provinces. Here you get lots of people from all over with resulting fantastic things to try:

Uruguayan Chivito restaurants, Argentine Pizza and Steak houses, Venezuelan steak houses, Cuban-Spanish soups to which I am addicted, Colombian hot dog joints etc. etc.

Outward business culture

Business wise, I think Miami is more focused on the rest of the world than say San Francisco. I have always been interested in technologies that make a difference in the poorer parts of the world. Miami being one of the 2 most important centers for business in Latin America (the other being Panama) is by default outward.

San Francisco is extremely international, but in a strangely inward almost insular way. Smart people from the whole world congregate in San Francisco, but it seems to me that once they arrive (including myself) they naturally focus too much on what the SF digerati thinks, assuming the rest of the world will follow. Granted this has created things such as twitter and github which the rest of the world pretty much ignored until recently.

Growing Tech community

The Miami tech community is growing. It is clearly not as large as San Francisco’s and probably will never be. That said, the community is vibrant and everyone seems to know everyone else. Many foreign entrepreneurs are moving to Miami as well. I’ve run in to more Danish (and of course Latin American) web entrepreneurs here than in San Francisco.

Last night I went to the Miami Ruby Brigade meetup which was pretty well attended. Refresh Miami a cross disciplinary group of people interested in technology has become an institution and I’m looking forward to attending my first next week.

What about San Francisco?

I still love San Francisco. Living there was a good experience and I certainly recommend any tech entrepreneur or programmer spend some time there. The best thing about being there is the killer tech and startup community, but thanks to twitter and google groups you can easily keep up with much of that from where ever you are in the world.

Anyway I’m looking forward to spend a couple of years here in Miami.

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How to go about getting a credit card processor

Just came across this great article by Daniel Tenner on How to get a Merchant Account.

Considering how many businesses there are out there, one would think this process might be smooth and painless by now. Just apply for a merchant account, sign on the dotted line, and receive your merchant id in the mail a couple of weeks later. Unfortunately, this is not the case. Obtaining a merchant account can be a long and complex process, particularly if you’re a new, small business that’s going through this process for the first time.

Go read his article now if you think you ever need a merchant account. He describes the process very accurately. I thought I’d add my 5 cents to this as well, with a few other things you need to worry about before picking a processor.

Originally the Merchant Account and Credit Card processor were separate companies. They still are, but most processors now hide this fact by offering a bundled merchant account through a partner bank of theirs. You may end up not even knowing what bank that is.

At Agree2 we opened our account last year with Braintree who have been very responsive. The paperwork did take a lot longer than we thought and involved a few changes to our site. They also did want to see a prototype of our credit card payment page as well.

Don’t use a proprietary api

If you use ruby be sure to use ActiveMerchant. It provides a really well designed API for dealing with most kinds of payment processors. I’m sure there are similar libraries for other languages.

The reason why this is important is that it helps protect you against lock in to the processor. If for some reason you can’t open an account with your preferred provider or they close you down, you don’t have to rewrite your code from scratch. These things happen to good companies.

So start your search for a credit card processor from the list of supported gateways on the ActiveMerchant page.

Use a Vault

I would say that if you are building a SAAS kind of business with recurring payments, you absolutely need a processor that supports some sort of vault. A vault is a secure store of credit cards numbers on the credit card operator’s own servers. Several of them do that now. Braintree for one.

Due to new security requirements from the credit card associations (Visa and M/C) it really is not feasible for small operators to store the card details locally anymore. So if you are developing your application with credit cards stored in your database, be aware you will need to change this.

Also never, ever store the CVV anywhere. It is completely against credit card association rules.

Briefly the way the vault works is that when a user gives you their credit card details you store it in the vault, even if you don’t need to charge it straight away. In return they provide you with a vault id. This you DO store in your database and you provide it to them every time you charge it in the future.

Updated Fixed some language issues and explained the Vault further. Thanks to Travis for his feedback.

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Refactoring the Consulting Agreement

Over on the Extra Eagle Blog our company blog, we are trying to create a new simpler and shorter Consulting Agreement.

If you’re a consultant, work freelance or even if you hire freelancers why not check it out. We’re looking for your input on creating the perfect general purpose consulting agreement.

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"People like me", profiles of a different kind of entrepreneur

A couple of years ago I started posting translations of a fascinating daily feature called “Gente como yo” from the Panamanian news paper Dia a Dia.

Each article profiles a small business owner in Panama. These businesses are completely different than what most people who read this blog are doing. But they are nice and short and I think provide great inspiration for all entrepreneurs, no matter where they are.

I’ve been inspired by some of the recent profiles to start translating them again.

A time of writing these are the profiles I have translated:

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Getting the AT&T Quicksilver USB HSDPA working on a Mac

As a note to future self and to anyone else coming home with AT&T’s QuickSilver USB HSPDA modem I’ve just jotted down my notes about it here.

The official name for this is the Option Icon 322. The helpful AT&T staff says to go the option web site to download the drivers for the Mac.

Going to the Icon 322 Download Page you get this helpful screen:

After some experimenting I discovered that the Icon 225 Download Page looked promissing. I downloaded the Mac version of their GlobeTrotter software.

Once you start installing it you will see this screen:

Make sure to ignore the instructions and insert the modem before you go any further.

Once this is installed run the application “GlobeTrotter Connect”. Before you connect you need to go to the Preferences and click on the “3G/EDGE/GPRS” tab and enter “ISP.CINGULAR” in the APN field so it looks like mine below:

Now you should be able to connect. It took way to much fiddling to get to these steps.

Warning if you have installed the tools following their instructions without the device inserted, you need to uninstall it completely and try again.

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RubyGem is from Mars, AptGet is from Venus

The Debian world seems to be on a rant on why the RubyGem’s are bad and why we should all be using aptget instead.

For rants see: Wouter – Rails? Stay the f* away from my system, Gunnar Wolf – Ruby has a distribution problem as well as the official Debian take on RubyGems.

However, the Debian/Ruby Extras team fear that Rubygems will make it much more difficult to package and distribute Ruby software in Debian (similar concerns have been raised by other individuals and GNU/Linux distributions)

Updated: Just discovered that Gunnar actually wrote this really good post It’s just a different mindset. Not necessarily a sane one, though, which I think is a way better explanation of his concerns. I still don’t see why Gems is “the most obnoxious of them all”. Gem’s can and should improve. But at its current state I actually do like it.

I always wondered why their rubygem package was intentionally broken. But never took the time to worry too much about it, when it’s easy to uninstall it and install it from source.

RubyGems like CPAN are about being OS agnostic when writing and deploying our apps. At the application level, I really do not care nor want to care about what server os I’m running.

I develop on Mac and deploy to Ubuntu, Gentoo, Redhat and OpenBSD. Using aptget, rpm, portage and pkgadd is fine for initial server setup and on going maintenance, but for day to day deployment of applications nothing but a PITA.

Different worlds, different points of view

The fact is that we are talking about 2 completely different worlds here. The whole thing is something very much akin to the old Men are are from Mars, Women are from Venus meme from a few years back.

For me my focus is the application. Most Ruby developers write applications for a living. For sysadmins their focus is on keeping servers running. Most Debian maintainers probably come from that world. Regardless if my assumption is right or wrong on that, their focus is definitely on Debian and not on Ruby.

So you now have the situation where an American is laughing at the stupid Limies calling a cigarette a “fag” and an Brit laughing at the stupid yanks calling a bum a fanny.

Get over it. We come from different worlds and have to live together. If your job is maintaining a bunch of sysadmin type services such as mail, dns etc you know what you need to do your job. Application developers also know what we need to do our job. It might even be that these things are different.

However if your job as a sysadmin is to support several web applications server, then I’m afraid when it comes to the applications you are no longer king. You need to support the developers and not hinder them.

But as Gunnar says:

By using Ruby Gems, you dramatically increase entropy and harm your systems’ security.

This is what we politely call FUD in the tech industry.

On the server it is the sysadmin’s job to understand the benefits of postfix vs. sendmail. tinydns vs bind etc. It’s the DBA’s job to decide on when MySQL 5.1 feels stable enough to use in production.

It is our job as application developers to understand the finer points between RedCloth 3 and 4.1. RubyGems allows us to test our applications with specific dependencies and make sure that this is exactly how they are deployed.

This enables us to have the confidence to deploy without having to do full regression testing when moving from a Gentoo to a Ubuntu server. Or to deploy minor updates from our Mac’s onto a server.

After having spent years of managing servers manually, the simplicity and beauty of deploying with capistrano is amazing. Besides initial server setup (which I can soon wave goodbye to thanks to PoolParty) I want to focus on the application.

RubyGem’s give me the freedom to develop on a Mac/PC and deploy onto just about anything. I deploy onto Ubuntu, OpenBSD, Redhat and Gentoo.

aptget is fantastic at what it does, installing base software on my server. Maintaining my application dependencies is just not its job. The Debian community is right to be conservative. However the ruby world works at tremendous speed, change is part of our core DNA.

I don’t want to necessarily be installing a new MySQL or GCC version on a daily basis, but I am willing to use the often daily updates of ruby gems. As I have the tests that prove they work and fantastic transparency about what was changed via GitHub

The Debian maintainers should stop breaking software out of some misguided principal. For gods sake Debian is an Open Source OS not North Korea. You broke your RubyGem package, now fix it.

There must be some way of creating virtual packages that just install the gem. This method could be reusable for Perl’s CPAN packages and any other application level packaging system.

Update: Violent platform wars going on over this post on Hacker News

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3 ideas for innovating Securities Law

Due to the SEC’s closing of Prosper I do think that it is time to address the SEC rules, which were created by FDR during the New Deal. It was a very different world then. Not that I think they did a lot of good at that time either.

We need the ability to innovate, even in the world of securities and investments. We need to lower the barriers to entry as the larger players who can cross them do not have real incentive to innovate.

The cost of creating a startup is lower now than ever. Often the cost of following existing security regulation is more than the amount sought.

Personal loans on an exchange are even less likely to ever pass existing securities law unless you happen to be David Bowie.

Here are my 3 basic ideas for innovation in securities and investments.

1. Warning labels

I know, I know. I hate warning labels as well. But I’d rather have warning labels and allow anyone to invest than the obnoxious innovation killing rule about Accredited Investors.

2. Special registration rules for micro securities

A $1000 loan should not have to follow the same rules as a $500,000 angel funding round. Why not just require them to be offered through a regulated exchange service instead. I think special rules should be in place for sub $100k securities. I’d be willing to accept sub $25k if it would allow it to be passed.

While I don’t think any kind of registration with the SEC really is needed, I could be persuaded to accept the idea of a very simple free REST based web service for registration of the security with the SEC.

Think tax id, amount, offer date, description and a url to more information on the exchanges web site. The SEC could publicize this information and allow queries of the data. Of course I really think this service should be offered to be run by a private industry organization and not the SEC or we would likely have to wait for 5-10 years for it to be implemented.

3. Regulate the exchanges and not the securities

While I personally don’t think we need any form of regulation. The realities of the day are not really about less regulation. An innovative approach would be for the SEC or congress to regulate a new form of exchange. This exchange would be regulated and have to follow certain rules, but would allow smaller micro securities to be exchanged.

I was working on a project with a couple of really smart people nearly 8 years ago for creating an equities market for micro financing in the 3rd world. The project never came out of prototype stage, but one idea that fascinated me was to tax and regulate the exchange rather than the startups offered within. This would allow developing world governments to achieve revenue and regulation, while keeping a low enough barrier of entry that even very small micro businesses (like these ones in Panama ) could utilize the exchange.

This was our solution to the problems that Hernando de Soto) the brilliant Peruvian economist believes for the basis for most of the economic troubles in the developing world. I have written before in A global virtual shanty town about how similar issues stop innovation and growth even outside the developing world. The SEC/Prosper debacle is evidence of as much.

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SEC to startups, don't you dare innovate

Prosper were just sent a cease and decist by the SEC for offering investments without registration. Prosper is/was one of a small handful of P2P lending markets offering an innovative approach to lending, allowing normal people to lend money to each other.

Not that I am a lawyer, but from reading the ruling, it appears that for Prosper to be allowed they would need to register each and every loan with the SEC as well as every investor would need to be an Accredited Investor. Either of these 2 would be impossible to do for them or anyone else trying to offer a similar service.

Using existing rules, I think the SEC were following clear rules. That does not stop them from being evil of course. Personally I can’t see either how the constitution even permits them to shut down Prosper without a trial. They are somehow allowed to both make the rules, execute them and judge them.

Reves ruling

The SEC metions the Reves ruling and lists the following rules from it:

(i) the motivations of the buyer and seller; (ii) the plan of distribution; (iii) the reasonable expectations of the investing public; and (iv) the existence of an alternate regulatory regime.

They argue that (i) is breached as:

… Prosper lenders are motivated by the desire to obtain a better return on their money than they otherwise could in another venue. While some Prosper lenders may be motivated, in part, by altruism, altruistic and profit motives are not mutually exclusive.

Oh, horror that someone would like better returns than in the bank.

(ii) is breached because as they say:

With respect to the plan of distribution, the Prosper notes are offered and sold on the internet to the public at large. There is no special level of financial sophistication or expertise that Prosper lenders must have.

Those are the rules, I know but just look at the current financial mess and read anything by Nassim Taleb to see what happens when “sophisticated” investors are let loose.

(iii) is breached because:

bla. bla. bla. … Prosper lenders reasonably expect a valuable return on loaned funds and would reasonably believe that the Prosper loans are investments.

Again they are right according to the rules. Obviously lenders believed they were making an investment.

(iv) is breached because there is no alternative regulatory scheme:

Finally, with regard to whether an alternate regulatory scheme exists to reduce risk to potential investors, there are currently no appropriate regulatory safeguards for Prosper lenders, such as those against misleading statements by a borrower about the purpose of a loan, the borrower’s employment and income, or even the borrower’s identity, or against misleading statements by Prosper.

This is where I believe they are wrong. Granted there is office anywhere in Washington DC called the “Person 2 Person Lending Exchange Regulatory Commision”. However in the US we do have these 3 great regulatory schemes called the free press, contract law and the judicial system.

Prospers.org and apparently a whole host of blogs are busy auditing and criticizing Prosper all the time. There is plenty of information available to anyone, which should make you think twice about investing in Prosper if they are risk averse.

E-Gold were under similar constant crowd sourced regulation via their mailing lists and online tools. Read more about E-Gold’s innovations.

While Prosper may claim they weren’t a bank or under the SEC, they were always under contract law (Both Common Law and UCC). The same can be said for their borrowers and lenders. They have apparently been pursuing law suits in the courts for some time. I have no idea if they have done enough here, but then it is the job of a crafty lawyer to come up with a class action lawsuit to keep them on the right path.

Innovation is needed, new rules are needed. The SEC followed their rules and protected the existing financial industry who have done such a bang up job in recent years protecting our wealth.

Updated: Just posted 3 ideas for innovating securities law where I talk about how the SEC could allow innovation.

Updated: Thanks to David for pointing out that they aren’t actually closed, but just not able to post new loans until they get registered

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e-gold founders avoid jail

I am glad to hear that Douglas Jackson and associates manage to avoid jail and get probation, community service and a fine instead.

I still think it’s extremely unfair that a service as innovative as e-gold were punished like this. Apparently so does the US District Judge Rosemary Collyer:

According to cnet:

U.S. District Judge Rosemary Collyer said the men deserved lenient sentences because they did not intend to engage in illegal activity. Even though, Collyer said, the U.S. Justice Department wanted to use the cases to show “this new day of Internet crime is going to be…vigorously prosecuted,” that alone was not enough reason to incarcerate the defendants.

While the courts don’t always do the right thing in this country, I am glad to see that they still serve their function as a safety valve against over zealous government.

Look at the situation the financial system is in right now. It is based on ancient technology and an ancient operating system. The government is throwing trillions of dollars against an unsound system and sending the Patriot Act against innovators.

E-Gold were one of the players, who truly attempted innovation in the financial space. Douglas Jackson’s genius and insight in his quest for sound money is seen in that even after all of this has happened to them, they core value of e-gold still hasn’t changed much.

For more read this article I wrote earlier e-gold innovated and were finally brought down. Also read the DGC Magazine interview with Douglass Jackson here.

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Agree2 is now officially launched

Goodbye Fax, Goodbye Fedex, Goodbye Mont Blanc pens… Hello Agree2.

What started as a proof of concept prototype in creating agreements roughly 2 years ago is now officially launched. We have been in beta for a long time, but now we feel the time is right to lift the beta tag and introduce our commercial plans.

But first let me explain what Agree2 is all about. Plain and simple we are all about helping you reach agreement.

See the Agree2 launch Post for more information or go straight to Agree2 to sign up.

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What Lawyers could Learn from Programmers

AmLaw Daily has a great interview with Richard Susskind about his new book The End of Lawyers?: Rethinking the Nature of Legal Services. It is essentially about the fundamental changes that are coming in the business models of lawyers due to changes in technology in general and the economy as a whole.

The book points to a future in which conventional legal advisers will be much less prominent in society than today and, in some walks of life, will indeed have no visibility at all. This, I believe, is where we will be taken by two forces: by a market pull towards commoditization and by pervasive development and uptake of information technology. At the same time, I identify a whole new set of jobs for lawyers who are prepared to spread their wings.

The fact of the matter is that almost everything that is not highly specialized has come down in price due to technology and commoditization. Richard argues that lawyers have fought against this for too long and need to start changing the way they do business or they will loose for good.

The cost for entrepreneurs of almost all repetitive non specialized things is trending towards zero. We all know that having our own server farm is now pretty much a silly thing to do, unless you are in the server farm business.

Ruby on Rails and Agile methodologies also introduced us to the innovative concept that our smartest most creative people shouldn’t spend 90% of their time on boring repetitive things like configuration and requirements documents.

Why should we still pay top dollars to lawyers for them to fill out word templates or advice us on simple things that google could solve just as easy for us? Why use a law firm to pay a premium on incorporation when 100s of companies who do this well are competing for your business via Google Ads?

Fear, Uncertainty and Doubt

The simple fact is that we pay big bucks to lawyers for silly tasks because of the centuries old campaign of FUD spread by the law industry about people doing things for themselves.

Like Interior Designers lawyers have essentially managed to run an outdated protection racket in the US. Each state has a private association known as a Bar Association which has a state granted monopoly on deciding who can practice law and also pretty much in deciding what “practice of law” means.

Nolo Press and Agree2 are forced by these rules to put silly disclaimers like this on our sites and books:

These also try as much as they possibly can to retain the lawyers monopoly on filling out word templates.

Legalese is another weapon for creating FUD in entrepreneurs. If you look at a contract and can’t understand it, the theory goes you should call a lawyer and have him revise it. Most don’t and hope everything is fine.

Law scholar Adam Freedman who wrote the brilliant Party of the First Part argues that legalese as a concept was pretty much invented and has been preserved by the law profession as a method of job protection over 500 ago.

The current argument I most hear from people who should know better is that each silly little piece of legalese is there because it has a specific legal meaning within the court.

I call total BS on this. If engineers believed in this we would still be riding our cotton to market on a horse drawn carriage. Judges are people. The vast majority of them very intelligent and perfectly able to understand plain English. If some new precedents have to be created so be it.

I know many programmers who live by these same principles. Talking technical BS where it isn’t necessary and overcomplicating architectures and code to preserve their jobs. It’s BS when we do it, it is BS when lawyers do it.

The good news is that the programmers who broke with this BS of the secret brotherhood of programmers now have more work than they can handle and bill at much higher rates, due to previously unheard levels of trust between the client and the programmer. I’m certain the same will be true for the lawyers who break the ranks of secret hand shakes, double talk and word templates.

the lawyers who break with tradition and build new traditions will probably end up with more work than they can handle. The ones who don’t will loose out to Agile US Lawyers, Online services and offshoreing, just like what happened in the US IT industry.

We need more simple on-line legal services

In the comments to the above interview Patrick McKenna says:

Online subscription services typically require a significant initial investment in non-billable time to establish and then take about three years to break-even. Those on-line services that were launched by many UK law firms five or more years ago are proving to be extremely profitable today. Meanwhile, too many US firms are obsessively intent on short-term billable hour requirements to consider making longer-term investments of this nature.

Just imagine the cool and profitable services a smart innovative (Agile) lawyer could come up with working with one or two good programmers.

Online company registration systems are a great example. They can and should be a lot more innovative. In the UK there are several law firms and Accountancies that offer legal/accounting services as complete package deals. Almost all US services are stuck in the Web 1.0/AOL era.

A corporate structure can easily be standardized with an online service to handle meetings, share registers and all standard form documents people use now. Innovate and make a lot more than you would billing people for dum repetitive work. Then focus on being their on standby for more traditional creative work for your now much larger client roster.

Shameless self promotion alert: We at Agree2 are trying to create a system for both lawyers and non-lawyers to manage agreements and legal templates. Our API would allow you to easily create and manage such services. If you have any ideas or would like to talk to us about it please email me personally at pelle@stakeventures.com.

Be the next Lawrence Lessig

The GPL revolutionized software. Several years later Lawrence Lessig helped revolutionize the world of publishing with the Creative Commons License.

There are lots of other things that need revolutionizing. I’m in the Legal Committee of the Open Web Foundation where we are trying to create an open standard IPR license to allow employees of companies to be able to work on web specs without fear of IP attacks. This is important work, but there are lot more interesting things that should be commoditized.

Imagine when talking to prospective employees or investors that you could say we are incorporated under the CCA (Common Corporate Agreement). This imaginary package would be a standard Articles of Incorporation, Memoranda of Incorporation etc. It would be written in as plain English as possible and be sufficiently good to protect both founders and investors. The idea is like the GPL it is a common non negotiated concept that everyone understands.

Y Combinator have graciously published their package of Series AA Equity Financing Documents which offers some of this. Y Combinator have managed to standardize a lot of these things as part of their own business model, which is great. However they are not a well analyzed immutable generic object like the GPL. For more on these documents checkout The Startup Lawyers Analysis.

This is where someone like Lawrence Lessig comes in. A sharp charismatic lawyer who is willing to take on the existing traditions. We the entrepreneurs are willing to follow you. If you are such a lawyer read Seth Godin’s Tribes which should provide great inspiration.

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Great Business idea #2: Managed MySQL or PostgreSQL on SliceHost and EC2

Are you a MySQL or Postgresql scalability expert? Here’s an idea for you. Create and manage a MySQL and/or Postgresql cluster on SliceHost and one on Amazon’s Ec2 cloud. The customers would be people hosting their services in these clouds.

Your job would be to manage scaling, security, monitoring, backups and all of those things. We your customers would sign up and you would give us our connection details, provide monitoring services and links to backups on s3. As a matter of fact the gui would probably benefit if it was as nice and simple as the SliceHost gui.

EngineYard already does something similar as part of their hosting plan. More than the individual slices I feel this is their real value add.

The business model? You could either do tiered plans ala slicehost. Hook it up with Amazon’s Flexible Payment System and you could offer nice metered plans ala EC2.

Future services? How about remote mirroring between slicehost and ec2? Your customers could switch at will.

A simple version of this could be launched into beta by a single dba and a half decent rails programmer. If you’re both, what are you waiting for?

Starting costs? The cost of two slices at slicehost or two on EC2. You could make serious money doing this quickly. You would probably only need 10 or so paying customers to break even. This you could almost certainly get within a month. This is good steady monthly cashflow I’m telling ya.

Customers? Well me for one. I know it’s not that hard to setup MySQL clusters. I’d just rather not have to. I’d happily pay $10-20 for a low volume plan and considerably more for high volume. I’d be perfectly happy with a metered plan as well. With that I wouldn’t hesitate in moving all my rails projects onto it.

Go on do it, and let me know when I can sign up.

Update: See the comments below ScatterHost is being launched offering exactly this service for MySQL on EC2. Great news.

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