1. Why are the shares divided into preferred and common?
2. Why does the preferred stock have a limited “1x” return?
3. What will happen with liquidation preferences in future rounds?
4. What will happen with dividends?
5. Does the preferred stock have to convert to common to get more than its money back? Why? How?
6. Don’t these restrictions make preferred shares seem less “good?”

The short answer is that this is a standard seed round term sheet that balances all the issues in a reasonable industry-standard way that won’t hamstring follow-on rounds. What that means is that venture investors, and also their lawyers, expect to see companies with a structure that is within the normal variation of such things. The standard, as I’ve written before, is to see a Delaware C-corp with a reasonable division of equity among the founders, some sort of vesting, a clean balance sheet, and a reasonably clean cap table overall. Complications on any of these points can arise, and some variation is certainly common, and some variation is actually meaningful, purposeful, and beneficial to the company.

Of course there are two positions on each of these kinds of issues, but if you think about contracts as mechanisms for transferring risk from one party to another, then some structures make less sense because they’re economically inefficient by  not assigning a risk of loss to the person best able to prevent that loss.

Here are some longer and more precise answers:

1. Preferred and common shares — this is the traditional structure for venture-financed companies. The two classes of stock help fine-tune the relationship between the investors and the founders in light of the risk/rewards appropriate for each. Preferred stock allows certain holders, i.e., the investors, to receive their investment back before any return accrues to the other holders, i.e., the founders. This is the general practice. The use of preferred stock also provides other high-level protections to investors even if they own less than a majority of the company, which would not be the case if they only held common stock; there are similar protections for founders holding common stock even if the preferred stock holders own a majority of the company on a fully diluted basis.
2. The upside on the preferred shares is not limited. It is a 1x non-participating preferred. This means that the preferred stock holders have an option in the event of a liquidation event of some kind: (a) take their money back or (b) convert to common stock. The choice means that holders of preferred stock will, in the event the company is sold very early, not face a situation where they lose money and the founders make money.
3. It is the company’s goal, and standard in the tech industry for venture-financed companies, to maintain the 1x non-participating preferred structure. Whether those terms would vary in the future for a round of venture financing with particular investors cannot be determined. But the protections of current preferred stock holders to approve certain additional issuances of preferred stock generally acts to prevent unfair future sales of stock.
4. It is the company’s goal, and standard in the tech industry for venture-financed companies, to not actually declare and issue dividends. The basic assumption is that at the discount rates implicit in angel and venture valuations, it makes more sense for the relatively small amount of cash that dividends would represent to remain invested in the company for a far greater return. Also, since few early stage companies are producing cash, dividends are generally not distributions of free cash flow but just a deduction from cash on the balance sheet. That’s a very different corporate finance strategy, one that most startup CFOs would not suggest. The same points as it #3 regarding future rounds apply here except that dividend provisions rarely change; liquidation preferences are more likely to be different from round to round.
5. Yes, conversion to common is generally deemed to occur immediately prior to the closing of the liquidity event, e.g, a merger or IPO. The specifics are spelled out in the transaction documents; the general format can be seen in the Series Seed documents linked below.
6. Preferred shares are always thought of as better because they are protected on the downside. See Fred Wilson’s example in his post linked below for the basic scenario in which preferred stock investors are protected. As a general rule of thumb, in the absence of particularized 409A valuations, common shares are thought to be “worth” approximately 10% of the value of preferred shares; this ratio reflects the partial protection against downside risk that is the preferred return.

Some links:
Series Seed documents

Fred Wilson of Union Square Ventures discussing the liquidation preference: he discusses the point often on his blog; it could be helpful to read his comments.

In reference to a post on the use of the term aggressively, I wrote:

These comments seem like nitpicking and pedantry until you start to listen carefully and accept the empirical, outcome-based approach that Ken Adams has followed. What do courts do with our contract language? Isn’t that a significant goal of drafting? To tell parties to what standards they can expect to be held?

Every time I read one of these posts it energizes me to re-read my form contracts for even simple things like entity formation (startup and nonprofit), founder’s documents, and venture financing.

I have been in discussions with some of my colleagues around the country on creating both a new new set of startup and venture documents and some additional materials (still in stealth mode!) for entrepreneurs. If you’re interested in hearing about these directly when they’re available, sign up for free RSS updates, or send me an email at rick@rickcolosimo.com.

What’s a convertible bridge note?

A convertible bridge note is a not-uncommon financing instrument in venture capital. This instrument is very common when an investor has effectively decided to invest and wants to give the company operating capital while the investment is finalized.But that’s typically just referred to as a bridge note whereas “convertible bridge note” is more a term of art referring to the instrument and technique I describe here.

This type of note functions like any other, but a few additional terms are often added: first, the note has more particularized conversion requirements that are tailored to what the parties expect will be an outside round with a more reasonably precise valuation; second, the return for the note investor will include both some element of interest and some additional return; third, the additional return, which is designed to mimic or at least make up for the equity return that would have otherwise been gained via a seed equity investment, consists of either a fixed return, regardless of time, or a fixed rate of return, regardless of amount.

Why would anyone do this?

The rationale for convertible bridge notes is part of the continuing fuzziness of venture investing (still reaching back, in my mind, to the dotcom bust), along with some recent discussion by Fred Wilson of why he finds himself not attracted to these sorts of deals. (I’ve got a need to do a whole series of posts on some of the issues Fred raises in this post; the guy writes stuff that opens a whole host of issues, which might be one reason this post, by no means unusual, had 135 comments at last visit.)

For the earliest stage startups, there is a high variance in terms of coming up with a reasonable valuation. Standard seed round terms and conditions make it easier to avoid trying to price any of those items (which I’m convinced no one does, has done, or will likely ever do with intent or knowledge). But every company still faces the three inherent risks (the VC triumvirate): technology risk, market risk, and operations risk (aka team risk). These have otherwise been described as “Is there a real market?” and “Is this the right team?” These risks don’t go away just because you standardize terms, and their impact on valuation often falls into the realm where reasonable people might disagree — can prices be maintained? How much can sales be ramped up? How long will the sales cycle be?

When the right set of risks is hindering the deal, then a skilled corporate lawyer (e.g., me) may suggest using a convertible bridge note to allow the parties to do the deal they want, which is fundamentally about allocating capital to the pursuit of the business’s objectives, and deferring the open question, valuation, in a way that is fair to both sides, investor and company.

In short, the convertible bridge note is properly employed when both sides want to do the deal, believe in the company and its prospects, want to treat each other fairly, and would rather get the “right” answer than disagree and kill the deal. (Note how the critical point here is plainly addressed in Fred’s post:

But I am a sophisticated investor. I do this for a living. I can negotiate a fair price with an entrepreneur in five minutes and have done that for a seed/angel round many times.

Investors

For angel investors, the use of a convertible bridge note has certain advantages over either a seed-round Series A or common-stock financing. First, the question of valuation is deferred in exchange for a known return from the time of the investment to a future valuation event. This deferment reduces the risk for investor and company that the valuation arrived at may differ greatly from the future financing, thus being somewhat “unfair” to either investor or company. When the angel investor and the company both want to treat the other fairly, this financing method helps eliminate the risk of unfairness.

Second, the note is debt, which gives the investor priority over other equity investors (similar to the priority in liquidation of preferred stock).

Third, the technique is common and well-understood by venture funds, so there is little risk of inadvertently creating potential problems in the structure.

Fourth, the auto-conversion terms can protect both parties by substituting the more formal, and often more extensive, rights of a Series A holder for rights under the note that can then be tailored to specific circumstances.

Fifth, a bridge financing can be completed in days versus weeks or longer for a preferred stock financing, in part because of the seniority of the debt over the equity and different regulatory requirements.

Sixth, the bridge note is a substantially cheaper transaction in terms of legal fees and other transaction costs.

Company

What’s in it for the company and founders? Simple: they get to bet on themselves and use the investor’s capital to do so. If the only possible structure were an equity round, founders would be constantly torn between their view of valuation based on their view of the assumptions about execution and the investor’s view on the same thing. There are always ancillary ways of tweaking the analysis, but few of them work well for startups (earnouts is a good example of something that works in a public company context where the valuation is relatively fixed).

If founders execute according to their plan, they will retain more of the company (by way of an effectively lower valuation for the bridge money) than if they don’t execute as well. But under either scenario, the investor and the founders are moving in the same direction and with the same vision. Both want the company to do better rather than worse, and preserving that joint mission is, to me, the best part of why bridge notes work under the right circumstances.

The reason I list as #6 above, transaction costs,, is really one of the worst rationales, and I’m close to removing it from this list. I have a former client whose company was choked to death, and then his personal life nearly ruined, by maintaining a convertible debt structure for far too long. They just never got around to cleaning everything up, and much like my objections to LLCs, the looser regulatory framework can lead a company quickly down the path from efficiency to complacency.

You may or may not get a formal list from the other side, depending on their level of formality and the nature of their advisors. Some investors know exactly what they are looking for and will figure out what they want to do from your financial model and a series of conversations. Others assume that the only way to be sure is to review a mountain of paperwork. The real answer lies somewhere in-between for most companies.

So, to get you started or at least calm you, here is a super Short Form Due Diligence Request List for a seed round investment or low-key quasi-acquisition, such as an asset purchase or stealth acquisition.

First, keep in mind that the other party may, and probably will, ask for additional information. Our goal here is first to identify anything that might concern them so it can be defused or resolved before it’s ever disclosed. (Hint to bad lawyers: you cannot hide things; there’s always a second copy floating around; the goal is to solve the problem so you can disclose how it has already been fixed.) Our second goal is to streamline as much of your work as possible so that you are not under time pressure later. The third goal is to identify the factual support for the business plan/budget that will be a critical piece of the transaction.

Here is the list of other materials you should be gathering in the background as negotiations continue, documents are drafted, and the deal moves forward.

1. Financials — Copies of all historical financials for existing operations: Income Statement, Balance Sheet, and Cashflow statements. (A backup version of a QB file is something that I regularly work with to extract these directly if necessary.)
2. Material contracts — all contracts that are either above a specified dollar value ($10-25k) or are otherwise important to the continued operations of the business on a similar basis. This should usually include customer contracts, all leases, all promissory notes, and IP licenses, and anything to do with stock or securities (like a warrant agreement or agreement to trade stock for services of a consultant).
3. Corporate documents — Copies of current articles/certificate of incorporation & bylaws; minute book with board/shareholder consents & minutes.
4. Other risks — A description of any pending litigation, whether company is plaintiff or defendant; any audit letters from auditors if financials have been audited in last 3 years; a description of any off-balance sheet obligations or other liabilities; and a summary of any related-party transactions, individually or in the aggregate greater than $25,000.

This ThoughtStorm Due Diligence Request list is a version written from the perspective of an investor and is a little more detailed than what I have above. It’s more like a reasonably thorough list that will get you most of the way to complete for an early-stage company.

This one gets a #FAIL from me.

Hearkening back (or forward, since I don’t know if I’ve posted it yet) to my thoughts on why I write, one of them is definitely to signal to founders and directors of small and startup companies when they need to call a lawyer. I guess I’ll have to follow up soon with my hot-button post.

I think that it’s really useful for me to tell people when they absolutely need my advice (taking investment money of any kind), when I can almost certainly help (non-standard commercial contracts), when I can add value (helping negotiate a deal), and when I’m not helpful (picking colors for the website design). Honesty from me makes my clients more efficient, and I hope that it s’s more evidence to them and the not-yet clients that I fit their definition of “trusted.”

To me, “crowd” is just the plural of “open,” as in open data.

But crowd doesn’t always work, and crowd doesn’t always scale (or, as I’ll discuss here, not in the right way).

Since Kickstarter got a lot of press as a way to make “projects” start moving with seemingly free or no-strings or on-my-own-terms money, people have been asking me about extending this to startups as a [pre-]replacement for venture capital and angel investment, both of which are seemingly harder to come by and once again slower in the bust than in the boom.

First off, we need to get a quick leader’s reconnaissance in, a lay of the land so that we’re all talking about the same thing. This is particularly important when it comes to “raising money,” which in startup-land usually means one very particularized thing, namely the sale of securities by an issuer to investors in an unregistered offering. Yes, I know I should have turned on the “legalese” tag for that sentence, but this is one area where you can’t fool around and paraphrase, or worse yet, euphemize.

Selling stock, warrants, options, and convertible notes to investors is generally always the sale of securities. Borrowing money through traditional promissory notes can be the sale of securities. The sale of securities is regulated up, down, and sideways by the federal government in the form of the SEC (and its regular partner, the DOJ) and by the states through the state attorneys general.

Take this lesson to heart:

1. Sale of securities  = highly regulated

2. Highly regulated => do yourself and your lawyer a favor and call before agreeing to do anything.

Securities law is one area of the law where even lawyers get lawyers. This is not DIY.

Your working model for securities should go like this: sales of securities require lots of expensive formal paperwork unless my lawyer tells me we have an exemption. Exemptions are available for most traditional venture investments (VCs are accredited investors and so are most real angel investors). Getting $1000 each from your cousins is generally not okay. Asking everyone you know or putting “raising series A” in your email sig are outright bad. These last two are examples of what the SEC may readily describe as a “public offering.” Public Offering, when it’s part of IPO, has a nice ring to it. When it’s part of your seed or series A round, it’s definitely flat.

Public offerings always require lots of expensive paperwork because that’s how you get to sell shares to everyone who wants them: the disclosure in the prospectus, written in “plain English” to comply with voluminous SEC regulations, is considered enough to allow a reasonable investor to evaluate the wisdom of buying stock from the company.

Crowdfunding, IF YOU MEAN selling securities to people through a nice public website with lots of visitors, is a problem. It’s almost certainly a public offering and will create big problems for you, the kind of problems that can easily kill a real venture financing.

Actually, Kickstarter itself doesn’t allow “investment and loan solicitations.” IndieGoGo, another site, is “not offering equity investments.” (I think it’s good that these sites are keeping people out of trouble.)

Advanced Masterclass Tip: you could conceivably use this method to sell securities only to foreign investors, but it’s probably not worth the trouble of trying to make the required restrictions fit into a site that’s designed to show everything to everyone. You’d be better off looking for some sort of angel investment opportunity site — which would at least be more likely to keep you out of inadvertent trouble.

NEXT: Crowdfunding a startup: what does work?

Post or email your questions on crowdfunding, and if they’re not already planned in the next post, I’ll work them in.

Are any of your intrigued by soliciting an investment in yourself, paying back with a portion of your earnings? The FAQ page is, sadly, empty; questions abound that the “template” contract doesn’t answer.

The question was essentially whether the fellow with some IP to build a business on should form an LLC or a corporation. In typical LinkedIn fashion, off-the-cuff answers that are specific end up being wrong. In my mind, if someone is asking this question, they either want a quick answer without worrying too much about whether it’s the right answer, in which case they might as well just phone a friend, or they want to understand *how* to make the decision.

As my readers have probably learned by now, I’m happy to educate clients on how to make decisions, on what factors to balance, and point them in the right direction on perceived issues that are just red herrings. At the end of the day, we all have to make our own decisions. Even if you decide to defer to a lawyer to make this sort of call, even if that lawyer is me, then you’ve decided to adopt (if only by proxy) my view of the world and my evidence to you that I understand your goals and plans well enough to make a recommendation that is right for you, just you, in your exact situation at this exact time and place. That’s what I do and how I do it.

====

Dan, the answer to that question isn’t usually determined by just how you’ll exit but also who you may need (or want) as Investors and their requirements, the amount of capital your business plan requires, the timeline between here and there, and what the company will look like as it’s operating (the activities it undertakes, the risks it creates, the nature of the competition, and the underlying business model).

The business model is basically how you take capital from Investors, convert it into revenue and gross margin, and do those things at an SG&A level that leads to the generation of free cash flow.

So, in a nutshell, that’s the start of the analysis that I and other startup lawyers do when advising entrepreneurs. Not everyone belongs in a Delaware C-corp even though almost all Silicon Valley-style tech startups do.

I’ve linked two articles that will round this out a bit for you.
Good luck!

Links:

• Incorporate a tech startup
• Compare ownership structures

Here’s my edited answer:

As someone who’s represented dozens of startups, closed probably 100 venture deals, and cleaned up too many small companies to count, there is in fact a right way and wrong way to do this.

The best way, if you’re planning on a software company that will be seeking traditional VC money, is to form a Delaware corporation, taxed as a C-corp, that owns and develops the IP (the software). That structure works for VCs without creating problems.

Here are some quick points:

1. Using an S-corp or LLC taxed as a partnership means that there can be leftover tax liabilities. It’s not worth the trouble to diligence them, so you’ll just end up either killing the deal or hopefully putting the existing entity behind a chinese wall and having it be a shareholder in a new — yep, Delaware c-corp.
2. Profit sharing with employees can be done in many ways, but stock options are straightforward and well-understood both by VCs and software engineers. There’s a plethora of information available to everyone on how to value, structure, exercise, and pay tax(!) on them.
3. Ownership, management, and governance can be turned into sticky problems. Using a standard structure like the DE C-corp helps everyone focus on the actual issues instead of the wrapper.

The only realistic alternative, if you have substantial other income that could be sheltered and sufficient skills and funding to bootstrap for a while, would be to use one of the alternate structures (LLC w/partnership taxation) deliberately so as to harvest tax losses while you are developing to the point that you will seek VC funding and then execute the chinese wall maneuver I described earlier.

Think of it this way: it’s hard enough to have a great idea, start executing it, interest a VC, and close funding. Why would you let something like an uninformed legal entity structure jeopardize your deal? As you can tell, I’ve taken companies down several of these paths. Some are way better than others.

Non-lawyers, and lawyers new to transactional practice, have probably never really heard of a legal opinion or what it does. Briefly, the legal opinion letter is a carefully prepared document that is designed to allow a third party, i.e., not the client, to “rely” on what is stated in the opinion letter.

Why does someone in a deal want a legal opinion from the other party’s lawyer? There is the stated reason and the deeply true reason. The stated reason is that the lawyer/law firm writing the opinion letter is liable to the third party for what is said in the opinion letter. That might be simple or difficult to prove, and you can imagine that when lawyers draft contracts about their own liability, they are even more stereotypical in terms of drafting convoluted long sentences that exclude all the important things and attempt to remove the liability and responsibility that you were looking for in the first place.

What’s the deep reason? Someone I worked for framed it this way: the purpose of the legal opinion is to put enough fear in the lawyer that it triggers a frank conversation with the client, protected by the other party’s attorney-client privilege, that might reveal important facts unknown to the lawyer that will affect the transaction. In other words, if I’m on the hook, I’m going to be extra sure to ask you for all the documents related to earlier sales of stock, convertible debt, or other money raised. By creating a process for this outside of the inter-party negotiations, the legal opinion balances the tendency for a party not to talk about “bad” news. [As an aside, this is the smartest thing I ever heard that guy say. HT to you know who.]

As for how this affect’s Ted’s proposal: Ted suggested that opinions drive up costs because of firms’ concerns about risk. While good lawyers are going to do the necessary work to track down the operative facts so that their clients do not make false representations and warranties, there are always (a) those who cut corners, for whom the opinion may bring some back on course and (b) those who make mistakes, for whom the opinion process is unlikely to correct anything since I doubt that opinion reviewers are interested in re-doing the work to test a capitalization opinion, for example.

But as an investor, I do want the other party to have the benefit of getting all the legal advice I’m paying for. As a company, it’s almost always better to adjust a deal to work around a few changed facts than try to fix things afterwards when you’re already in the wrong. And, although investors are paying, in effect, for the pre-deal legal advice if the funding goes through, it’s odd that the cases where it matters most are those where the process reveals a dealbreaker.

Where do I come out on this? As a company-side lawyer, I think that the opinion could be dropped without huge problems, but I fall into the class that thinks we should have correct reps and not tread down the “hopefully true” path without some deliberation and frank discussion with the other side. As investor’s counsel, I could see myself legitimately advising clients to forgo opinions to save money when I knew the company lawyer personally. I could not see extending the reputation of one well-known lawyer to an entire firm, but maybe to a small group or team that practices together.

What do you think about not asking for legal opinions? Are there other purposes they serve for you?

Caveat: Ted and I worked on a deal several years ago where he represented the investors and I the company. So, my opinions of Ted’s proposal are definitely colored by personal experiences (in this case, for the better).

Ted proposes that small series A rounds, like seed rounds have in the past, take on a more standard “short-form” approach to the structure and volume of the financing documents. He notes that costs for using longer documents might add $7,000-$10,000 in legal fees each for the investor and company, which is not insignificant for a small $1-1.5m financing.

On its face, the uninitiated might not realize that it’s not the documents themselves, in terms of pieces of paper that lawyers draft from a wide range of forms, that create the “excess” costs: it’s the promises on those pages that are the culprits. Promises about facts mostly: what we call due diligence.

Fundamentally, the purpose of contracts, in general and definitely venture financing agreements, is to allocate risks among the parties. These risks come in three flavors: present, operating, and potential problems.

• In the “present” category, investors are concerned about knowing what is actually going on today with the company: they want to know what’s behind door #1 as much as possible. So, for example, we ask founders and companies to promise that there are only so many shares of stock, or that the intellectual property has a clean trail, and that employees are allowed to work for the company.
• In the “operating” category, we create rights to information and ongoing reports so that the “present” concerns above are regularly addressed, and we provide a bundle of rights, some affirmative (the investors get power to do something) and some negative (the investors get power to vote on something). In this category are information rights, board seats, protective charter provisions, and operating covenants.
• In the “potential problem” category, we include provisions that protect the value of the investment under different scenarios, such as future financings or sales, changes in the risk exposure of founders or other investors, and registration rights.

Before analyzing what changes should or could be made to the usual course of business, it is important to make explicit what every VC knows but often forgets: the company’s legal fees come out of investor money, the VC’s legal fees come out of investor money, and so the cost of these extra provisions is very much equivalent to insurance bought by investors with their own money! (Yes, these expenses don’t get offset against the money raised and owed, so like points on a mortgage, companies either raise more or have less cash to work with. Same result.) Ted even calls these agreements an “insurance policy,” recognizing their function and, implicitly, their underlying economics.

To me, the revealed preference for the status quo by VCs indicates that these provisions are worthwhile expenses. This could be because they actually chose to spend money this way or, perhaps more likely, the information cost of determining that they are inefficient uses of resources is too high given the uncertain value. Ted’s put a stake in the ground for value, right or wrong. What’s the risk of choosing to go with Ted? Any VC making that choice in a given investment where it turns out wrong would be subject to having to “prove” that he wasn’t simply being reckless about disregarding “industry standard” terms. (It’s a West Coast version of “nobody ever got fired for hiring IBM). I don’t know many VCs that want to deal with that, regardless of whether they have the clout to survive no matter the outcome (e.g., John Doerr). In other words, there’s enough failure built-in to the VC model that few would be willing to invite more!

So where does this leave Ted and his idea? Here are some options:

1. The NVCA could/should adopt Ted’s trim set of documents to ease adoption in the wild. Having drafted sets of Brobeck-based forms for Stanford Law School classes, knowing that those forms dated from Gunderson-era drafting, we all know that forms can take on a life of their own.
2. VCs could share, anonymously or within the attorney-client privilege, outcome and history data on investments. Empirical research on the actual usage of different provisions would be extremely helpful to those trying to allocate costs all around. This research project could be big, but there is a wealth of resources available to undertake it and track the performance of these contracts.
3. It will be critical for VCs, the real constituency to be addressed, to recognize that they are not choosing Ted’s model in a vacuum, but against alternatives with different costs and risks.
4. Finally, there is a role for lawyers like Ted to put on the counseling hat and help VC clients understand when they are spending too much money on too little protection. My two favorite examples from Ted’s piece: environmental representations for a dotcom and financial statement reps (or, sometimes, an audit!) for a new corporation.

We as lawyers should be analyzing these documents like the insurance agreements they actually are (transferring risk between parties); Ted even calls them insurance policies. The hallmark of well-crafted insurance policies is that they transfer each risk to the party best situated to bear it. One [thought-]exercise I would often run through, on either side of a financing transaction, would be to wonder what the other side would be willing to trade in terms of either pre-money valuation or amount invested in exchange for some term of vague or frankly unknowable value. Want two demand registrations? Up the valuation by $50,000? Want 90 day lockups instead of 180 days? Take $25,000 less money in. These sound like silly examples, don’t they? But they’re absolutely [un-]realistic in that my opinion is that no one at the table — company, investor, or either lawyer — has any estimate (as opposed to a guess within an order of magnitude) of what any of these terms is worth.

And that’s what makes Ted’s point sing. If all sides are spending time, money, and effort to trade worthless rights and privileges that no one really wants to keep or avoid, there just might be a better way.

I’m with you, Ted. Who’s with me? What techniques have you used to narrow down the range of operative reps and warranties or place a value on other terms?

(I’ll address the legal opinion question in a separate post as well as one alternative for implementing some of Ted’s ideas in a format I invented years ago that might also be useful for analyzing past deals to discover the economic benefit/cost of the suspect provisions.)