Standard contracts have a powerful network effect, and we’re seeing it in action at Common Paper.
Thousands of companies have signed contracts on our platform, and, on average, repeat recipients sign 52% faster than first-timers. As more companies review and sign the standard agreements, the odds get better for our users that the next contract they send out will be to someone already familiar with them. Put another way, Common Paper users get more value as more people use the standards.
Repeat recipients sign 52% faster
Faster across all contract types
This is not an isolated phenomenon. Across every contract type with at least six months of history, we see meaningfully faster time to sign among repeat recipients. The light bars represent the median time to signature for first-time recipients, and the dark represents the median for people who have seen it before.
Building the network effect
The most important thing that our users want from their contracts is speed.
Of course, contracts have to be enforceable, clear, and appropriately manage risk, but startups don’t succeed because they have the world’s best representations & warranties clause. They will, however, have a meaningfully higher chance of success if they can accelerate their sales cycles.
Contract review often takes up a large percentage of the sales cycle, and accelerating that directly leads to growing revenue faster with no additional capital.
Speed has been a central design goal of Common Paper standard agreements from the beginning, and not just for repeat signers. Network effects are only possible if many individuals get utility on their own first.
The agreements are structured to be easy to understand. The cover page lists all of the variables – the terms that most commonly vary from deal to deal and company to company. The standard terms never change, so there’s no need to re-read them over and over.
Rather than each side starting with a proposal that is highly biased toward their own position and ultimately getting negotiated towards the middle, the standard terms start in the middle and help everyone save time.
It’s much harder to sneak something into one of the standard agreements. Deviations are called out upfront, so there’s no concern about the other side burying a landmine in an innocuous-seeming paragraph on page 18. This makes the whole process less adversarial.
Standard Contracts with Network Effects
There are plenty of other standard contracts that benefit from network effects. The SAFE, NVCA Model Docs, and IAB Standard Terms are all much more valuable to the companies that use them because their counterparties are already familiar and comfortable with those agreements.
I, along with the vast majority of other homeowners in Philadelphia, bought my house using the Pennsylvania Standard Agreement for the Sale of Real Estate. The negotiation was fast and easy because my agent, the seller, and the seller’s agent were all aligned on the agreement before we got started. If I was the first homebuyer to try to use this agreement, it would have been a very different story.
Not a new idea
We didn’t invent the idea of analyzing contracts through the lens of network effects. More than 25 years ago, Marcel Kahan and Michael Klausner wrote an article in the Virginia Law Review titled Standardization and Innovation in Corporate Contracting.
The article deals mostly with corporate, rather than commercial contracts, but the analysis of making the contracts easy for investors by reusing standard terms has clear parallels with customers. Here’s one relevant section:
…the use of a common term reduces the expense that investors and securities analysts incur in evaluating a firm’s securities and comparing them to alternative investments… If a term is commonly used … the cost and effort entailed in understanding the term and its impact on the value of a security can be spread over many investments. If a term is idiosyncratic and difficult to evaluate, the securities to which it applies will be relatively costly to analyze.
Kahan and Klausner divide up the benefits of adopting standards into two categories: Learning Benefits and Network Benefits:
The private benefits to a firm of adopting a standard contract term can be divided into two conceptual categories, each with different implications. One set of benefits, which we call “learning benefits,” arises when a firm adopts a contract term that has been commonly used in the past, regardless of whether other firms will continue using it in the future. A second set of benefits, which we call “network benefits,” arises when a firm adopts a term that will be part of the firm’s contract at the same time that it is part of many other firms’ contracts, regardless of whether it has been commonly used in the past.
Measuring Standardization
It’s hard to precisely measure a network effect. One innovative way of measuring the success of standard contracts comes from Robert Barlett’s paper on standardization in VC funding docs. He tracked the success of the NVCA model docs by looking at the growth in the proportion of series A charters that matched the NVCA template. The penetration grew from 3% in 2004 to 85% in 2022.
That lines up with our experience. Common Paper’s seed round used the NVCA forms, and it was dramatically easier since our attorney, our investor, and our investors’ attorney all had experience with the NVCA docs.
AI, Standardization, and Network Effects
Does standardization matter now that we have generative AI? Who cares about the template if ChatGPT can analyze and negotiate your contract for you?
Imagine you’re the founder of an early-stage startup getting ready to raise money from angel investors. You have special, early access to GPT-10. It can instantly draft and edit contracts, it’s free, and it never makes a mistake.
Would you have it draft a contract for you, or would you download the template for the SAFE and fill in the blanks for your company?
The bespoke contract from the genius AI is a bad idea. Regardless of how good the contract is, your investors have never seen it before. They’ll be confused as to why you’re not using the same standard contract as their other investments. It will be extra work for them to review it, and it might not be worth it if they are making a small investment.
Generative AI is a huge step forward and dramatically improves many aspects of working with contracts. It doesn’t negate the benefits of standardization. Standard contracts are better for both humans and machines.
If you’d like to take advantage of the network effect and get your contracts signed faster, join the thousands of companies using Common Paper standards.