Founders & Friends with Scott Orn

A Startup Podcast by Kruze Consulting

Startup Podcast by Scott Orn

Subscribe on:

Posted on: 11/18/2019

Kelsey Chase of Aumni on the journey from VC corporate lawyer to startup founder

Kelsey Chase

Kelsey Chase

Founder and COO - Aumni


Kelsey Chase of Aumni - Podcast Summary

Kelsey Chase of Aumni started out as a corporate lawyer working on venture capital deals - but now is a startup founder, offering technology that helps VCs and founders turn complex deal document data into valuable information.

Kelsey Chase of Aumni - Podcast Transcript

Scott: Hey, it’s Scott Orn at Kruze Consulting, and welcome to another episode of Founders and Friends. And before we start the podcast, let’s give a quick shout out to Rippling. Rippling is the new cool payroll tool that we see a lot of startups using. Rippling is great for your traditional HR and payroll. They integrate very nicely, but guess what? They did another thing. They integrate into your IT infrastructure. They make it really easy for when you hire someone to spin up all the web services and their computer, which sounds kind of like not a huge deal, but actually we did the study at Kruze. We spend $420 on average just getting a new employee’s computer up and running and their web servers up and running. It’s actually a really big deal. It saves a lot of money, and the dogs are eating the dog food. We see a lot of startups coming in to Kruze now using Rippling. So, please check out Rippling. Great service. We love it. I think we have a podcast with Parker Conrad. You can hear it from his own words, but we’re seeing them take market share. So, shout out to Rippling, and now to another awesome podcast at Kruze Consulting’s Founders and Friends. Thanks.
Speaker 2: (singing) Founders and Friends with your host, Scotty Orn.
Scott: Welcome to Founders & Friends podcast with Scott Orn at Kruze Consulting. And today, my very special guest is Kelsey Chase of Aumni. Welcome Kelsey.
Kelsey: Hi Scott. Thank you very much. I’m excited to talk today.
Scott: Ah, thanks man. Well, we’ve been friends for a while. I had the venture capital background, and then I work at Kruze, and you have a product or a service that’s right in my sweet spot. So, I really wanted to have you on the podcast because I think what you guys are doing is really amazing. And maybe you can start off by just talking about what you guys do and how you had the idea for the business.
Kelsey: Sure, absolutely. I think to lead into that question and answer, I just would maybe give a high-level review of my background. So, I started my career as a corporate attorney with Wilson Sonsini. Of course, the big startup law firm in the Bay area and worked there for a couple of years representing venture-backed entrepreneurs and the businesses they were working on and also spent some time working at DLA Piper where the typical Wilson client base is startup companies and moved over to DLA and started representing more investors and worked with traditional venture capital funds, some corporate VCs, family offices, high net worth individuals, and really just became an expert in the ways that venture investing and venture capital transactions were structured. So, hold myself out as a venture deal lawyer and got some experience at some of the best firms out there. And so, from that—
Scott: Well, you know what’s amazing about that though too is that you’ve seen the startup side of it. You’ve seen both sides. So, the poor founder who’s never done a financing before, you’ve helped them through the process. And then, you’ve helped the venture capital fund that’s done 500 financing. You know both sides of the story.
Kelsey: Yeah, I definitely like to say I’ve seen sort of all sides of the table, but I think my take on that and just all the deals I’ve worked on is that the table is more of an oval than a rectangle. It’s very collaborative honestly, between almost all of the deals I worked on were usually, at that stage, very collaborative among the investors and the founders and even counsel on both sides. And of course, it gets contentious at times, but just being in the startup ecosystem at that point, once an investor and a founder have made a match to where they’re actually putting their deal to documents and having lawyers involved, usually a pretty good partnership is forming at that point.
Scott: And I’m sorry I interrupted you. So, you’ve got both sides of the table. You know exactly what’s going on. And then, that set the stage for the next phase of your career?
Kelsey: It did. So, I co-founded Aumni with a colleague of mine from Wilson Sonsini, a former colleague, Tony Lewis. So, Tony is also a deal lawyer, had some experience in M & A as well as in the back office of a VC fund, which will come into play talking about Aumni. But, Tony and I were I think, got some great experience at the firms but just always had an entrepreneurial itch. And we got together about two years ago and just started really discussing and brainstorming ideas around the venture capital space and just what we had seen as deal lawyers working at these big firms. And from that really came a revelation of some obvious pain points that we had seen in the venture capital space, both from my experience as a deal lawyer representing the entrepreneurs, raising money and the investors making investments, and then Tony’s experience working in the back office of the fund. And so, from that we created Aumni, and that’s A-U-M-N-I. It’s a play on assets under management and then, omissions. So, it’s Aumni. And we set out to develop a web-based application that analyzes and extracts the most critical legal, financial, and economic terms and rights out of the underlying legal agreement that represent all of these VC deals. So, in an essence, that’s what we do. We go into the deal documents. We pull out all this critical data, which now sits on a structured database that then powers this amazing dashboard that sits on the cloud.
Scott: And that dashboard is what folks like me or people that work at a venture capital fund consume. And it’s beautiful. Your guys’ design and the wave organism, all the information is so nice. I think when we first met, I told you that at Lighthouse, we had these gigantic spreadsheets, and it was just a maze. And at any given time, no one knew what had been marked up and what hadn’t been marked up or what needed to be written down. It was just like the classic, who knows? It’s all buried in the spreadsheet somewhere. So, this is the reason I love what you guys are doing. It’s all there in a really simple and easy to consume dashboard.
Kelsey: Yeah, absolutely. And it’s not so much portfolio management is what Aumni does, but it’s really portfolio intelligence. And the first thing that we realized as Tony and I were growing this company is the bulk of the market still uses a sheet-based technology to track their portfolio. And that’s small funds, large funds, medium funds, corporate funds. They’re all, by and large, leveraging some sort of tool like Google Sheets or Excel. And so, what we learned is that these investments are just so rich in economic and legal rights and data, and there’s only so much that you can do as you mentioned, Scott, with an Excel spreadsheet and just the amount of effort that is required to keep that thing up to date and the amount of institutional knowledge that really has to go into keeping that thing polished. And so, Aumni does have a function of portfolio management, and there are aspects of what we do that we’ll wholesale, replace things that funds are using Excel for. But again, the essence of what we do is we pull out this critical data from your underlying legal agreements, and because every data point ties back to your contract, it is really audit great data that funds can rely on, their service providers can rely on, and ultimately we think that you have the whole market will eventually move to rely on as well.
Scott: Yeah. That’s the beauty of your business is that you’re creating a giant network effect because if someone’s done a deal with X, Y, and Z startup, and then the next round comes in, and there’s 10 investors, you guys, in a way, have a really incredible view over Silicon Valley and the entire tech ecosystem. Because once that one deal gets marked up in a next round, that’s flowing through to the database and the console for all the other venture capital funds that are in that investment, right?
Kelsey: Yeah. We’ve really set up a really powerful network, exactly as you described it. The venture industry is a, by its function, is really like a lot of these fund raises are party rounds. And it is not atypical that any series A, series B, C, D round has anywhere from 10. It could have up to 50 different unique investors in the round. And so, what Aumni does is we’ve created software to really leverage that network so that co-investors that share a portfolio company can actually benefit from the Aumni network and have access to the same audit grade data.
Scott: It makes a huge difference. Maybe you can walk the audience because the people who listen to this podcast are super startup people. Maybe walk them through the things that Aumni captures and how you display that in the dashboard. They’re obviously probably going to go to your site while they’re listening to this, but maybe just kind of walk them through some of those key terms that need to be captured and how you show that.
Kelsey: Sure. There’s a couple. I can definitely talk about many of them. We’re pulling out tons of data because the truth is, if any entrepreneur that’s listening has raised venture capital funding before, you know that your rights are represented in hundreds of pages of dense legal agreements. And so, probably unless the founder has experience doing this or even the legal background, it’s really a tall order to even understand or track what’s existing in those agreements. And the same problem is true for the investors too, just really dense complex agreements that have lots of moving pieces in them. And so, we go in and analyze that data. And then, one example of a right … I’ll pick on one that actually our investors care greatly about, but the founders have interest in caring about this too is qualified small business stock. So—
Scott: We get asked about that a lot too because we’re a tax firm.
Kelsey: Exactly.
Scott: Keep going.
Kelsey: So, as I say that, Scott, my guess is maybe half, maybe more than half of entrepreneurs have no idea what that even means. Maybe some do. But, the—
Scott: Yeah, I think it’s only the ones that get tipped off by their lawyer ask us that. But, it does apply to a lot of the companies that are getting funded. There’re some thresholds. Why don’t you cover it, and I’ll chime in. But, explain to the audience.
Kelsey: Yeah, so it’s really … There’s this tax advantaged tax rule in the internal revenue code. So, it’s federal tax law that provides this amazing benefit for holders of something the code calls qualified small business stock. So, to meet that, there’s a whole host of tests. But basically, if you’re a startup and this is not legal advice, but if you’re a startup and you have less than $50 million of assets and you haven’t done certain disqualifying events, then shares you issue, you can benefit from being qualified small business stock. And it does have huge, huge tax savings implications for the holders, which tend to be venture investors in these early stage rounds. And so, to do that, however, there’s certain things that the entrepreneur or the company has to comply with to maintain the status. And so, to protect the investor, there’s usually two hooks, two prongs that get negotiated in a typical venture round. The first is that there’s something called a qualified small business stock. And I’ll use the QSBS acronym. So, the QSBS representation that the company makes to the investors, which essentially says, “I’m selling you, Scott, series A shares, and I’m representing to you that I’ve maintained the status as a qualified small business, and the shares that you hold are therefore qualified small business stock.” And the company’s making a representation in a legal document that the investors are relying on. So, that’s one of the hooks. The second is that there are ongoing covenants that the company will, and the investors will typically ask the company to agree to in their venture agreement. So, the covenant will say something to the effect of, “The company will use best efforts, reasonable efforts to maintain this stock as qualified small business stock.” So, those are two prongs and an example of two data points that Aumni just extracts right out of the agreements. And we bring that information to light for an investor across their entire portfolio, so they can quickly get a matrix of their qualified small business stock coverage and then start to really model out what is their tax exposure and how much savings could they have upon certain exit events, et cetera.
Scott: You explained that perfectly, and it is like a huge tax advantage. So, we do get asked about that quite a bit. And we kind of recommend to our clients that they be careful about what they promise on that because sometimes, investors will ask them to rep that it is a qualified small business stock. And we’re careful about asking our clients to rep that because there’s a lot of things that can trip that, especially funding sizes and things like that, so. But, it’s a really powerful term, and that’s awesome that you guys track it. I’m sure you track things like liquidation preferences, participating preferred, stuff like that too, right?
Kelsey: Yeah, we definitely track … We track the common economics in the rounds, so exactly. The liquidation preference, the valuation, size of the option pool, the investors syndicate, and how much of the company the investors end up purchasing, and how the various classes within the investor base are split up. So, if there’s multiple classes with preferred, we track the investors ownership across those various classes. So that, we would all put in the bucket of economics from the transaction. And then, we also, just being a company that was founded by two lawyers, we do go very granular on the legal rights. So, another fun one that I can almost with a lot of confidence say most investors are not tracking in any sort of granular detail are the types of protective provisions that a company is signing up to. And just a quick blurb on what the heck protective provisions are, these are either affirmative or negative covenants that the company is signing up to. So essentially, things the company can and cannot do without the investor’s written approval.
Scott: Like things like send a ton of money to a foreign subsidiary without approval?
Kelsey: Yeah, and—
Scott: Or sell the company without approval?
Kelsey: Yeah.
Scott: That kind of stuff?
Kelsey: Right. And for the transactional folks, know that most of these deals are put together on the national venture capital association forum, the NVCA forum. And so, I know one restriction that just got added to the standard form was the ability to play in the cryptocurrency space. The last four or five years, you probably saw a fair amount of startups kind of pivot into that space where they may have raised money on some other idea before that.
Scott: Absolutely. And we are not allowed to work with crypto companies because of some of the regulatory risk and insurance risks for us. So, I totally get why investors would care about that. One of my favorite ones is not being … I find that it’s a very smart protective provision that sometimes entrepreneurs don’t realize is oftentimes, there’ll be a vote as a share class to approve a transaction like selling the company. And that’s designed to protect the newest money in oftentimes, who came in at the highest valuation. They don’t want the company getting sold before two X, whatever the valuation is. They want three or four X. And so, they have the right to not approve a transaction as a share class like the series C or series D. And entrepreneurs don’t always know that, so they think they’re negotiating a deal that’s going to be good enough for everybody. But, it’s really only good enough for the early investors.
Kelsey: Right.
Scott: So, that’s something I can really see being valuable, and especially if you’re a series B or series C fund, having that data through Aumni at your fingertips is really powerful.
Kelsey: Yeah, absolutely. So yeah, you hit on some major legal rights that we track, and that is certainly around ownership and control. So yeah, certain events that require certain stockholder base, investor base approvals, oftentimes, especially with funds leading arounds, it’s not really a class. It’s actually a specific investor who has this whole walking right. So, lead, pick your favorite top Sandhill lead, series A lead that comes in. Not uncommon that Andreessen or NDA may have just this specific blocking right on certain activities. So, that is all information that we look at, and whether you are the lead or whether you’re a minority seed investor that is interested in the company later on, just understanding where the voting blocks and the control blocks are can be pretty important.
Scott: I totally agree. And for folks who don’t know, unfortunately, I was nominated to be the head of compliance at Lighthouse. So, I have all this experience in the nitty gritty of the back office of a fund. Before Aumni, the way you would answer a question around a company, whether they had, an investor had blocking rights or a share class had blocking rights and things like that, was you would literally run down the hall and ask the head of ops to pull out the file, or you’d be searching madly through a Dropbox or box folder trying to find the share person purchase agreement and trying to skim that and Control-F and Control-Find, and it was a total disaster. It was really, really hard to know what terms were in each deal. And even the fact that we had all these giant Excel, we were a very organized firm. We actually did things the right way because we were regulated and had to have a good compliance organization. But, even then, it’s just hard to find information and to be able … I really want to stress that this is pretty revolutionary to be able to go into a web app and just type in a company and see exactly what you own and what your protective provisions are. It’s really powerful.
Kelsey: Yeah, you said that perfectly, Scott. And the other point I would emphasize is that Aumni is a white glove offering. So, we do all of that analysis and extraction on your behalf. So, our tagline is it’s as simple as sharing your closing agreements with us. And then, that allows us to kick off and start analyzing your investments, and you really get the out of the box experience with all the data populated in there.
Scott: It’s really amazing. Now, let me ask you this. Who loves you more? Is it the GPs? Is it the companies, or is it the back-office folks at the venture capital funds? I think everyone probably likes you, but my suspicion is the back-office people just absolutely love you.
Kelsey: Yeah, we’ve got a lot of advocates in the back office, work directly with a number of CFOs or VP of finance, several general counsels and AGCS. And yeah, we really address pain points that they’re dealing with on a day to day basis. So, helping the back office off quite a bit. And also, the application does run for an office capabilities too. But, the folks that are really managing a portfolio and trying to understand, like you said, running down the halls to get answers to these questions, that that tends to be right now, the finance and legal professionals at these funds.
Scott: Yeah, you make their life so much easier. No one loves the fire drill, and those people are … For folks who don’t know the CFOs and head of ops at funds, they’re totally overworked. They have way too much going on, and because they’re in the deal business and support the deal people, it’s almost being a lawyer at an outside firm or being in investment banking. They have to jump when something’s happening or there’s a crisis, or they’re just really pushing to get a deal done. Because in venture capital, everything’s competitive. Until you get that term sheet signed and even until you close the deal, for a very attractive company, something that could go off the rails, you can lose it to a competitor. So, everyone at these funds is working really, really hard. So, making their life easier, it’s just incredibly valuable.
Kelsey: Yeah, folks definitely, definitely work hard. And just some of the top professionals, I think, in the private capital markets are working at these funds. And I’ve met a lot of amazing people along the way, and I think that’s definitely right. They do have a tall order managing large, complex, inherited portfolios. The space does have quite a bit of change and turnover too. So, you have professionals walking into funds that they have just the legacy portfolio with who knows where the documents or the information or the trackers even are. So, we can really come in. I think another value proposition that we bring to the table is just codifying a firm’s institutional knowledge into a software application. So basically, trying to just bring together the firm’s entire knowledge base into one place so that you really just help communication, collaboration, and access to key information.
Scott: I totally agree. Because for folks that don’t know, a venture capital fund will always run 10 years, sometimes 12 or 15 years depending on how many extensions happen in the fund. And so, when you’re stacking three, four, or five funds over a 10 or 15-year period, it gets pretty crazy. And these portfolios typically have a lot of investments in them. Like at Lighthouse, we’d have over a hundred investments in each portfolio. So, you’re right about that institutional knowledge. It can slip away very easily. And even the people who have been there for a long time, it’s hard to remember the third investment in fund three. There’s just too much going on to remember this stuff. So, kudos to you folks for figuring this out.
Kelsey: Not to what I think we also do really well is just being able to access legacy data. I know initially, it may seem like the value is on the active portfolio, the companies that are doing well now. But, we think the more data, the better. And giving you a full picture of a fund’s life cycle through, if it’s a legacy fund, and they may be on fund 10, understanding the decisions and the data from those earlier funds. We just want to give maximum data and flexibility of accessing that data to the customers. And I think seeing the whole picture versus just the current picture, I know we’re finding that there can be meaningful insights from just seeing how early funds invested and how those early companies that they invested in are now outperforming or how they went.
Scott: Well, I totally agree. And I think a lot of that comes into play during fundraising.
Kelsey: Yeah.
Scott: Because that’s when it’s incredibly valuable, especially when you’re looking at vintages and different economic environments. And sometimes, one of the questions we would always get asked during financing or raising a new fund at Lighthouse was how did you do in your bad vintages? And what were the ones that moved the levers?” Or how many losses? Or how many write-offs did you have during those times? And so, the fact that we were able to say, “Hey, actually we made money even in the 2000 fund” was incredibly powerful for our prospective LPs. And I think you’re bringing that data to bear for all the funds. Now, for some funds, they’re just so good, and their track record is like … Sequoia probably doesn’t get asked that question because they are just … Everyone is probably feeling pretty blessed to be an investor in a fund like that.
Kelsey: Right.
Scott: But, for most of Sandhill and most of the top VCs in New York and Salt Lake, you’ve got to prove it. You’ve got to bring data and sell and get that fund closed, sell your investors. So, having all this at their access is very, very helpful.
Kelsey: Yeah, and so at Aumni, we work with funds across the entire market. So, first time startup funds, micro funds, middle tier funds, and some of the marquee names on Sandhill Road. And what I would say for the startup and early funds is what Aumni brings to their fundraising story is a feeling of being institutional grade. So, that proof of concept fund, we have micro funds that signed up with Aumni because it made them appear institutional grade so that when they go out and try to raise fund two, they’re very thorough and organized around the performance of fund one and can have quick access to data and information so that if they are trying to bring in some larger LPs in the next time, they just feel that much more professional and ready to do it.
Scott: It’s really smart. You guys have done a really good job. I’m really excited for you. This is really cool. Well, what are some of the … As we kind of head towards the end here, what are some of the new things you guys are working on and where do you want to take the company?
Kelsey: Yeah, it’s a great question. We are a startup, so the answer may change as we shift and shape, but—
Scott: Sometimes the answer is everything.
Kelsey: Yeah.
Scott: Those are the ones where I know I’m in trouble. When I say that, I need to pare it back because we’re a startup too. But yeah, what are you most excited about? That’s probably the question I should be asking you.
Kelsey: Yeah, so all joking aside, we are very focused. And we feel like we really have found our niche in being experts in the underlying legal agreements. And so, you can expect Aumni to do a lot more with that. And what we’ve done to date is we are great at analyzing legacy investments, investments that have already happened. And I think where you can expect us to go is even deeper on the analytics and data from those investments. And then also, what we want to do is thrust ourselves into the investment-making decision for deals that haven’t yet closed, so live deals. I think you can expect Aumni to be a really valuable partner as funds are considering investments and trying to analyze these complex legal arrangements before they cut the check or send the wire.
Scott: I love it. I look forward to the day where you’re a default item on the due diligence checklist. In fact, the Kruze Consulting due diligence checklist is on our website. I will add the Aumni diagnostic onto that checklist, so everyone knows they should be using you guys before a round closes.
Kelsey: That’s certainly our vision, Scott, is we think we will become the standard for venture investing, and we’ll be the source of data and truth around these complex docs. And we’re really excited to tackle the issue and feel very confident in what we’re trying to build here.
Scott: I love it. I love it. Well, thanks so much for coming by. Can you give a quick little recap of what Aumni does, and then also tell folks where they can find you on the web and maybe how they get a hold of you. And no pressure in giving out your cell phone number. Email is probably totally cool or just the website.
Kelsey: Yeah, so you can find me at Kelsey, K-E-L-S-E-Y at Aumni, A-U-M-N-I dot fund, F-U-N-D. So kelsey@ aumni.fund. Our website is also aumni.fund, www.aumni.fund. And yeah, Aumni’s here. We are the experts in analyzing complex legal agreements and pulling out the most important legal, financial, and economic data out of those and doing it in a really an audit-grade fashion.
Scott: I love it. I’ve been talking and following you guys since you were a two-person company, and I’m really thrilled at your success. Kudos to you and Tony, and many, many, many good days ahead. I’m really excited just to be in your world and hopefully be a customer pretty soon. And congrats on all your success.
Kelsey: Yeah, thanks a lot, Scott. This has been great.
Scott: Cool. All right, Kelsey, take care, buddy.
Kelsey: Okay, thanks.
Speaker 2: (singing) It’s Kruze Consulting. Founders and Friends with your host. Scotty Orn.

Explore podcasts from these experts