Entrepreneurs, coders and activists we need you to help reboot banking 2
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
My proposal to create a new Banking System 2
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.
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
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
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.
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
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
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.
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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.
Risky Business 1
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.
Agile Banking Talk 1
I gave my talk earlier today at Reboot 11 about refactoring the banking system:
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.
Contenture - A different take on Micropayments 1
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.
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.
Moved to Miami 1
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.
How to go about getting a credit card processor 2
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.
