9 ms·

The Un-American Rule on VC's Legal Fees

106 points by harveyesq 6y ago

simonbarker87 6y ago
I haven’t read the full article but this feels like a very American thing to me, a more powerful and wealthier party taking advantage of a weaker, dependant party to save the VC partners some money. I’m sure I’ll get downvoted first this, and I know it’s not quite what the title means but yeah paying my VC’s legal fees and having no choice over the firm they used really wound me up.
- o_class_star 6y ago
  This is in reference to the American standard business practice ("American Rule") whereby each party to a transaction pays its own legal bills. It is not necessarily connected to the more general American work culture (which I agree is as you characterized it, although I hope that changes with the recent defeat of the final boss of Boomer capitalism).
  - simonbarker87 6y ago
    Yeah, I get what it was in actual reference too, I was just inferring a secondary meaning around American business practices and the Must Win culture that is prevalent in American society. I like “Boss of the Boomers”
    - o_class_star 6y ago
      The last movement of "Dancing Mad" (FF6) has been playing in my head all week.
- simonebrunozzi 6y ago
  From the article/blog post: > The VC industry does not follow the American Rule. The unwritten rule is founders must pay for their own attorneys’ fees, plus their VC’s legal fees, up to a negotiated cap. So, if you did just read the first few sentences, you would have known why the author claims this aspect to be un-American.
  - watwut 6y ago
    I don't think this was reference to that particular rule. It was reference to reputation American businesses have and reputation "American ideology" have - that they consider more powerful people taking advantage of weaker one perfectly fine. That is the reputation.
    - redis_mlc 6y ago
      > That is the reputation. No, it's actually not. Is this some kind of lefty marxist re-narrative of America? I've been reading financial newspapers for decades, and have no idea what you're talking about in the B2B world. In the B2C world, the only recent change is binding arbitration. But consumers have lemon laws, etc.
    - harveyesq 6y ago
      Actually, that's close to what it was saying: "The American Rule" is a reference to a norm in law that your opponent pays for their own legal fees, and you pay for yours. See https://en.m.wikipedia.org/wiki/American_rule_(attorney%27s_fees) https://en.m.wikipedia.org/wiki/American_rule_(attorney%27s_... Compare this internationally: • The English rule is used, under which the losing party pays the prevailing party's attorneys' fees. So the American rule is that each party bear their own costs of litigation. Contracts allow parties to fee shift. Although the article equates fee splitting as the American rule, there's technically no such rule for transactions, but it does represent the general American sentiment on the subject, which is that parties should bear their own costs. Requiring the weaker party in a transaction to shoulder the financial load of a dominant party may be a common capitalistic practice, but it's not an American ideal.
- satisfaction 6y ago
  Would you claim that European rich groups don't toss their weight around?
  - watwut 6y ago
    They do, but in different style. They pretend they don't while American style is to defend it or even brag about it m
    - satisfaction 6y ago
      If you earned it then defending it or bragging about it may not make everyone feel great but that is fine in my opinion. When I see a rich person enjoying what they worked for I don't feel any type of way. What someone else does with their property should not affect you, if it does then look into your own personality and ask yourself why. It's rude to count someone else's money unless they ask you for that service.
lmeyerov 6y ago
I liked this. 3 is really 2 things, where the last applies to all and is so important -- 3a. The American Rule - good imo for seed/preseed. The VC is funding, so going unamerican when standard terms are available is lazy, mean-spirited, and net destructive valuation hijinx. It comes out of the negotiated deal value either way, so a VC is being loose with how much of the company they are freely giving away. 3b. Do what you agreed. A founder is essentially negotiating the rules for a new boss for the next 1-10 years, and this is one of the last and easier hurdles. So it's also a quick canary in the coal mine. Breaking faith on something so early + mundane that hits on trust, alignment, experience, and empathy right before then is such a warning sign!
deleted 6y ago
[deleted]
kenrose 6y ago
“it’s strange how legal fees are just under the cap or way over the cap with copious discounts, but we never see legal fees significantly under.” Correct. My own experience: whatever value you negotiate the legal cap on your term sheet, that’s the bill you get.
- xxpor 6y ago
  We see this time and time again in the US. Another example just off the top of my head: College tuition goes up the maximum amount the feds will pay in student aid (loans, pell grants, etc). It's perfectly rational, but it's not necessarily the best.
zb1plus 6y ago
Honestly, if I ever start a SaaS company, I'd rather just bootstrap from a developing country than deal with the hassle of messing with VCs. It doesn't seem worth it unless you are in an industry that requires a heavy capital investment to get off the ground.
- preinheimer 6y ago
  If you end up in that boat check out the Microconf community. It's full of folks who have made that call. https://microconf.com/ https://microconf.com/
o_class_star 6y ago
It's a cuck test. They want to know up front that you'll take abuse. If you "fail", by standing up for yourself, then they'll just work with some other interchangeable would-be founder who's more of a "culture fit". Legal fees are a rounding error to these companies. It's all about the "power move". They don't want to work with people who'll stand up for themselves over "a measly" $50K.
- ButWhatFor 6y ago
  I’m laughing too much at this. Agree “I’m making a $15mm investment I need you to cover my up to $100k in legal fees. If you can’t do that, deal off.” Has always sounded funny to me. But if you need money it’s just one of those things you have to do. I think what should happen is the whole syndicate should share in total legal fees pro-rata or something. That way the lead isn’t wearing all the legal fees. Also think this is based some in the standard practice of banks passing through their legal fees to those they lend to.
  - snaily 6y ago
    For an institutional fund, they can be different, non-fungible pools of capital. The $15M comes from fund limited partner (LP) commitments as part of the investable capital of the fund (i.e. was earmarked for investments and is not the fund manager's money, in a very real sense), but the $100k might (depending on the LP agreement for the fund) come out of the management fees, and if so, is very much part of the P&L for the fund manager. For a corporate VC, its typically all the same pool, though.
- choppaface 6y ago
  The article does cite how early VCs seek the legal fees because charging the funds might “mis-align incentives.” Could be phrased many ways, but evidently the fee burden is very much a power issue between VCs and investors, if not founders and VCs.
bdowling 6y ago
In both cases VC money is being used to pay the VC's fees. If the startup pays the fee, then the VC funds the startup and the startup writes a check. If the VC pays the fee, then the VC will negotiate a slightly different deal for the same amount of equity. VCs prefer the first option because they can show lower operating costs to their fund investors. Some startup founders prefer the second option because they don't like the appearance of paying for someone else's legal costs. In both cases the costs of the deal are borne by the deal participants; the question is merely which company's financial statements show the costs.
- lmeyerov 6y ago
  in theory. in practice, VCs are freer with legal fees, esp when bigger (big fund, corp, inexperienced, etc). article is right that lawyers reinterpret cap as 'target', so only choice is moving to VC's side, so any waste above cost of signing stock forms (...the excess) is borne by the VC. if it is say a corp vc who doesn't ultimately care, the inefficiency is kept out of the deal. if the VC doesn't want the inefficiency either, it is now squarely their responsibility. it can still get put into the invisible valuation math by the VC, but at least now in a comparable way across term sheets, and pressure for more competitive (efficient/low) pricing. jumping legal for 0k-10k into 20k-100k can sound like nothing to the VC side, esp the bigger ones, or maybe a reader here who is a FAANG employee, but to a lean startup, that is significant headcount. deal efficiency at preseed/seed is a real thing.
  - bdowling 6y ago
    Great point that some VCs will be less concerned about transaction costs than others. Also that some startups will be more concerned than others. Where the amount of concern over fees differs, there may be more controversy over how the fees are paid. Also if the fee is not capped and the startup will pay, the startup is right to be concerned about the fee eating into their post-deal capital.
    - lmeyerov 6y ago
      quick little numbers experiment: $1M seed for 18mo for luring folks at ~50% below market at 150K fully loaded (120K salary + 30K overhead) => 4.5 people All of a sudden, $50K might mean the difference between starting with 4 vs 5 people, which is a 25% difference in team. Or with 5 vs 6, which is 20%. So..... yeah.
murbard2 6y ago
It matters only up to the amount of transaction costs involved in negotiating the clause which is not 0 but not something to get in a tizzy about either. VCs need companies to fund just as much as the companies need capital. This is the mainstream economic view. Yes, you'll find scores of economic papers finding that "power dynamics" actually matter in negotiated agreements, but understand that they are published precisely because they purport to show departure from the consensus baseline which is that they really don't. https://en.wikipedia.org/wiki/Coase_theorem https://en.wikipedia.org/wiki/Coase_theorem.
jariel 6y ago
It's worth considering that the VC's are literally paying for it anyhow, it's their money going into the deal + transaction fees. As long as the terms are well known in advance to both parties, then really it's all a wash in the subsequent valuation calculation. If VC's want to 'require the company to spend more money on lawyers' then maybe it's good or not, but at that point the money is invested, it's going to go to ops or lawyers, if the VC's want it to go to lawyers ... well ... it's not like they benefit from it directly. The analogy used at the start 'each party pays their fees' isn't quite right because in most situations, it's adversarial - more money = more likely to win the case. In the VC case, the lawyers are not negotiating, just doing paperwork, moreover, when you're going to jail for fraud, it's not like you are exchanging money with the people prosecuting you. As long as you know that the legal fees for the transaction are part of the valuation ahead of time, and it's part of the valuation calculus, then it really doesn't matter that much.
- neltnerb 6y ago
  No, the startup is paying for it. With equity. The VC gave them cash for equity and now asks for cash back, so it ends up being a discount on the equity they just purchased. And theoretically they think that dollar for dollar the equity is worth more or there would be no point in them doing the deal, so they both get a discount and also get the thing they think is more valuable.
  - jariel 6y ago
    You're missing my point. " it ends up being a discount on the equity they just purchased." <- is accounted for in the valuation. There is no 'discount'. If the VC has to pay for the legal fees then those fees would be deducted from the valuation, and Entrepreneur gets literally 'that much less' in cash, for the same dilution. It's just accounting, and it doesn't really matter other than everyone has to understand up front that this is how it's going to work. It's just accounting.
    - neltnerb 6y ago
      It matters if the cost is unpredictable and only one side can control how much it comes to. The information isn't symmetric.
dbuder 6y ago
The whole thing annoys me, but this is what really grinds my gears: Frank again disagreed and so I made him an offer: If his client promised that it would charge no more than $15K in attorneys’ fees, then we would agree to use the NVCA forms. Frank agreed, but on the condition that we draft the forms. Although we had secured a legally enforceable right that no more than $15K in attorneys’ fees would be charged to my client, it didn’t matter. True to form, the IPO deal team ran a heavy due diligence over the next six weeks and amassed a six-figure legal fee. To get the deal done, my client was told it had to cover at least half the deal team’s fee, at which this point was well over six figures. They said the “$15K was a mistake” and the “spirit of the deal was always to cover half of our legal fees.” What’s ironic was that we had only one enforceable term in the term sheet and it was the $15K fee cap.
- harveyesq 6y ago
  Grinds my gears too! If it were up to me, I would have called the deal off.
throwaway93382 6y ago
This may be a very specific example, but it all goes back to the number one rule in raising: If you‘re a hot startup, you make the terms. If you‘re in need of money, they make the terms. If anything, focus on growth, revenue and timing so that you‘ve got both good curves in the reports and more than two investor options lined up when it‘s time to raise. Nothing else matters. We lost our biggest client around Series A stage and were strong-armed into a seed stage contract with bad valuation and lots of other unfavorable terms. We signed it because we had to. Two years later, we had managed to get our act back together and had a basically infinite runway through our own revenue. And that power to say no completely turned the dynamics around. The same main investor basically begged us to take more money, so when we wanted to accelerate a bit, we told him we had a last offer for him to invest and left the room with it on the table. He didn‘t even insist on participating LP, as he was so glad to get a small additional piece of that rocket ship. There‘s a million ways to screw founders and just a single way to avoid it: Show traction and the money will find you.
- PopeDotNinja 6y ago
  Guy Kawasaki says sales fixes everything.
  - NoOneNew 6y ago
    You mean have a business that's sustained by the general public and market instead of continous arbitrary funding? What kind of sick psycho are you?
panabee 6y ago
VCs pawning off legal fees on startups is an anachronistic byproduct from when all entrepreneurs lacked power in fundraising. forcing VCs to eat legal fees would lead to standardization and lower costs, which benefits everyone except attorneys. the only way this changes is if top entrepreneurs and VCs commit to a new baseline for legal fees. YC has already started chipping away but cannot break this ridiculous standard on its own. many elements of the VC-founder dynamic are broken today. it will be interesting to see which investors risk crafting a more balanced environment for startups. the downside is alienating their peers and jeopardizing peer-based deal flow, but the upside is attracting more founders and generating goodwill.
joshfraser 6y ago
Early stage deals should be done using standard docs that don't involve lawyers at all. Why should anyone pay 20k to have some legal aids fill in a template? It's insane.
- harveyesq 6y ago
  Fred Wilson agrees. In his mind you should be able to incorporate, draft and sign series seed documents (no negotiation) for $5K. Although that was said several years ago the same ideal should hold true today in 2020. https://avc.com/2011/03/a-challenge-to-startup-lawyers/ https://avc.com/2011/03/a-challenge-to-startup-lawyers/
supernova87a 6y ago
My observation from having worked for one startup is that there are tons of terms that have the form and appearance of laws and rules that indicate a law-abiding situation. (I mean according to what the public would regard as law-abiding, in hiring, firing, pay, bonuses, profit sharing, etc.) But in fact it is not. They look like rules and laws, but are really just legalese cover for "CEO-does-whatever-he-wants". Such as dilute your value however he pleases when a deal comes around. I suppose in this case it's the VC's cover too. Interesting to see the CEO complaining that he's the one on the wrong end of the stick.
gnicholas 6y ago
> By comparison, the top quartile hourly fees charged by corporate attorneys with 10+ years of experience is $450 per hour I was a seventh year associate at a Silicon Valley law firm when I left for my startup in 2014. At that time, my rate was $600/hr. I'm sure there are cheaper firms out there, but I'm also sure that rates have gone up in the last 6 years. The figures he quotes for the lawyers that were used ($1,200 for partner, $900 for senior associate, etc.) are about what I would expect legal fees to be at a first- or second- tier firm in Silicon Valley these days. Perhaps the $450 number is based on nationwide averages — but if so that's not really relevant to the cost of Silicon Valley lawyers. I know I wouldn't hire a lawyer around here who has 10 years of experience and charges only $450/hr. I'm not quibbling with the major thrust of the article (I'm a startup founder, so I'm all in favor of VCs covering their own legal fees). But when I read the stat above, it made me suspicious because it is so far off from my experience.
- harveyesq 6y ago
  Yeah the $450 an hour is a national number for all attorneys with over 10 years of experience, as reported by a website called Priori Legal (www.priorilegal.com). Also if you're not hiring a lawyer strictly because he or she is not charging over $450 an hour, I think you're doing it wrong. All due respect.

106 points by harveyesq 6y ago

I haven’t read the full article but this feels like a very American thing to me, a more powerful and wealthier party taking advantage of a weaker, dependant party to save the VC partners some money. I’m sure I’ll get downvoted first this, and I know it’s not quite what the title means but yeah paying my VC’s legal fees and having no choice over the firm they used really wound me up.

o_class_star 6y ago
This is in reference to the American standard business practice ("American Rule") whereby each party to a transaction pays its own legal bills. It is not necessarily connected to the more general American work culture (which I agree is as you characterized it, although I hope that changes with the recent defeat of the final boss of Boomer capitalism).
- simonbarker87 6y ago
  Yeah, I get what it was in actual reference too, I was just inferring a secondary meaning around American business practices and the Must Win culture that is prevalent in American society. I like “Boss of the Boomers”
  - o_class_star 6y ago
    The last movement of "Dancing Mad" (FF6) has been playing in my head all week.
simonebrunozzi 6y ago
From the article/blog post: > The VC industry does not follow the American Rule. The unwritten rule is founders must pay for their own attorneys’ fees, plus their VC’s legal fees, up to a negotiated cap. So, if you did just read the first few sentences, you would have known why the author claims this aspect to be un-American.
- watwut 6y ago
  I don't think this was reference to that particular rule. It was reference to reputation American businesses have and reputation "American ideology" have - that they consider more powerful people taking advantage of weaker one perfectly fine. That is the reputation.
  - redis_mlc 6y ago
    > That is the reputation. No, it's actually not. Is this some kind of lefty marxist re-narrative of America? I've been reading financial newspapers for decades, and have no idea what you're talking about in the B2B world. In the B2C world, the only recent change is binding arbitration. But consumers have lemon laws, etc.
  - harveyesq 6y ago
    Actually, that's close to what it was saying: "The American Rule" is a reference to a norm in law that your opponent pays for their own legal fees, and you pay for yours. See https://en.m.wikipedia.org/wiki/American_rule_(attorney%27s_fees) https://en.m.wikipedia.org/wiki/American_rule_(attorney%27s_... Compare this internationally: • The English rule is used, under which the losing party pays the prevailing party's attorneys' fees. So the American rule is that each party bear their own costs of litigation. Contracts allow parties to fee shift. Although the article equates fee splitting as the American rule, there's technically no such rule for transactions, but it does represent the general American sentiment on the subject, which is that parties should bear their own costs. Requiring the weaker party in a transaction to shoulder the financial load of a dominant party may be a common capitalistic practice, but it's not an American ideal.
satisfaction 6y ago
Would you claim that European rich groups don't toss their weight around?
- watwut 6y ago
  They do, but in different style. They pretend they don't while American style is to defend it or even brag about it m
  - satisfaction 6y ago
    If you earned it then defending it or bragging about it may not make everyone feel great but that is fine in my opinion. When I see a rich person enjoying what they worked for I don't feel any type of way. What someone else does with their property should not affect you, if it does then look into your own personality and ask yourself why. It's rude to count someone else's money unless they ask you for that service.

lmeyerov 6y ago

I liked this. 3 is really 2 things, where the last applies to all and is so important -- 3a. The American Rule - good imo for seed/preseed. The VC is funding, so going unamerican when standard terms are available is lazy, mean-spirited, and net destructive valuation hijinx. It comes out of the negotiated deal value either way, so a VC is being loose with how much of the company they are freely giving away. 3b. Do what you agreed. A founder is essentially negotiating the rules for a new boss for the next 1-10 years, and this is one of the last and easier hurdles. So it's also a quick canary in the coal mine. Breaking faith on something so early + mundane that hits on trust, alignment, experience, and empathy right before then is such a warning sign!

deleted 6y ago

[deleted]

kenrose 6y ago

“it’s strange how legal fees are just under the cap or way over the cap with copious discounts, but we never see legal fees significantly under.” Correct. My own experience: whatever value you negotiate the legal cap on your term sheet, that’s the bill you get.

xxpor 6y ago
We see this time and time again in the US. Another example just off the top of my head: College tuition goes up the maximum amount the feds will pay in student aid (loans, pell grants, etc). It's perfectly rational, but it's not necessarily the best.

zb1plus 6y ago

Honestly, if I ever start a SaaS company, I'd rather just bootstrap from a developing country than deal with the hassle of messing with VCs. It doesn't seem worth it unless you are in an industry that requires a heavy capital investment to get off the ground.

preinheimer 6y ago
If you end up in that boat check out the Microconf community. It's full of folks who have made that call. https://microconf.com/ https://microconf.com/

o_class_star 6y ago

It's a cuck test. They want to know up front that you'll take abuse. If you "fail", by standing up for yourself, then they'll just work with some other interchangeable would-be founder who's more of a "culture fit". Legal fees are a rounding error to these companies. It's all about the "power move". They don't want to work with people who'll stand up for themselves over "a measly" $50K.

ButWhatFor 6y ago
I’m laughing too much at this. Agree “I’m making a $15mm investment I need you to cover my up to $100k in legal fees. If you can’t do that, deal off.” Has always sounded funny to me. But if you need money it’s just one of those things you have to do. I think what should happen is the whole syndicate should share in total legal fees pro-rata or something. That way the lead isn’t wearing all the legal fees. Also think this is based some in the standard practice of banks passing through their legal fees to those they lend to.
- snaily 6y ago
  For an institutional fund, they can be different, non-fungible pools of capital. The $15M comes from fund limited partner (LP) commitments as part of the investable capital of the fund (i.e. was earmarked for investments and is not the fund manager's money, in a very real sense), but the $100k might (depending on the LP agreement for the fund) come out of the management fees, and if so, is very much part of the P&L for the fund manager. For a corporate VC, its typically all the same pool, though.
choppaface 6y ago
The article does cite how early VCs seek the legal fees because charging the funds might “mis-align incentives.” Could be phrased many ways, but evidently the fee burden is very much a power issue between VCs and investors, if not founders and VCs.

bdowling 6y ago

In both cases VC money is being used to pay the VC's fees. If the startup pays the fee, then the VC funds the startup and the startup writes a check. If the VC pays the fee, then the VC will negotiate a slightly different deal for the same amount of equity. VCs prefer the first option because they can show lower operating costs to their fund investors. Some startup founders prefer the second option because they don't like the appearance of paying for someone else's legal costs. In both cases the costs of the deal are borne by the deal participants; the question is merely which company's financial statements show the costs.

lmeyerov 6y ago
in theory. in practice, VCs are freer with legal fees, esp when bigger (big fund, corp, inexperienced, etc). article is right that lawyers reinterpret cap as 'target', so only choice is moving to VC's side, so any waste above cost of signing stock forms (...the excess) is borne by the VC. if it is say a corp vc who doesn't ultimately care, the inefficiency is kept out of the deal. if the VC doesn't want the inefficiency either, it is now squarely their responsibility. it can still get put into the invisible valuation math by the VC, but at least now in a comparable way across term sheets, and pressure for more competitive (efficient/low) pricing. jumping legal for 0k-10k into 20k-100k can sound like nothing to the VC side, esp the bigger ones, or maybe a reader here who is a FAANG employee, but to a lean startup, that is significant headcount. deal efficiency at preseed/seed is a real thing.
- bdowling 6y ago
  Great point that some VCs will be less concerned about transaction costs than others. Also that some startups will be more concerned than others. Where the amount of concern over fees differs, there may be more controversy over how the fees are paid. Also if the fee is not capped and the startup will pay, the startup is right to be concerned about the fee eating into their post-deal capital.
  - lmeyerov 6y ago
    quick little numbers experiment: $1M seed for 18mo for luring folks at ~50% below market at 150K fully loaded (120K salary + 30K overhead) => 4.5 people All of a sudden, $50K might mean the difference between starting with 4 vs 5 people, which is a 25% difference in team. Or with 5 vs 6, which is 20%. So..... yeah.

murbard2 6y ago

It matters only up to the amount of transaction costs involved in negotiating the clause which is not 0 but not something to get in a tizzy about either. VCs need companies to fund just as much as the companies need capital. This is the mainstream economic view. Yes, you'll find scores of economic papers finding that "power dynamics" actually matter in negotiated agreements, but understand that they are published precisely because they purport to show departure from the consensus baseline which is that they really don't. https://en.wikipedia.org/wiki/Coase_theorem https://en.wikipedia.org/wiki/Coase_theorem.

jariel 6y ago

It's worth considering that the VC's are literally paying for it anyhow, it's their money going into the deal + transaction fees. As long as the terms are well known in advance to both parties, then really it's all a wash in the subsequent valuation calculation. If VC's want to 'require the company to spend more money on lawyers' then maybe it's good or not, but at that point the money is invested, it's going to go to ops or lawyers, if the VC's want it to go to lawyers ... well ... it's not like they benefit from it directly. The analogy used at the start 'each party pays their fees' isn't quite right because in most situations, it's adversarial - more money = more likely to win the case. In the VC case, the lawyers are not negotiating, just doing paperwork, moreover, when you're going to jail for fraud, it's not like you are exchanging money with the people prosecuting you. As long as you know that the legal fees for the transaction are part of the valuation ahead of time, and it's part of the valuation calculus, then it really doesn't matter that much.

neltnerb 6y ago
No, the startup is paying for it. With equity. The VC gave them cash for equity and now asks for cash back, so it ends up being a discount on the equity they just purchased. And theoretically they think that dollar for dollar the equity is worth more or there would be no point in them doing the deal, so they both get a discount and also get the thing they think is more valuable.
- jariel 6y ago
  You're missing my point. " it ends up being a discount on the equity they just purchased." <- is accounted for in the valuation. There is no 'discount'. If the VC has to pay for the legal fees then those fees would be deducted from the valuation, and Entrepreneur gets literally 'that much less' in cash, for the same dilution. It's just accounting, and it doesn't really matter other than everyone has to understand up front that this is how it's going to work. It's just accounting.
  - neltnerb 6y ago
    It matters if the cost is unpredictable and only one side can control how much it comes to. The information isn't symmetric.

dbuder 6y ago

The whole thing annoys me, but this is what really grinds my gears: Frank again disagreed and so I made him an offer: If his client promised that it would charge no more than $15K in attorneys’ fees, then we would agree to use the NVCA forms. Frank agreed, but on the condition that we draft the forms. Although we had secured a legally enforceable right that no more than $15K in attorneys’ fees would be charged to my client, it didn’t matter. True to form, the IPO deal team ran a heavy due diligence over the next six weeks and amassed a six-figure legal fee. To get the deal done, my client was told it had to cover at least half the deal team’s fee, at which this point was well over six figures. They said the “$15K was a mistake” and the “spirit of the deal was always to cover half of our legal fees.” What’s ironic was that we had only one enforceable term in the term sheet and it was the $15K fee cap.

harveyesq 6y ago
Grinds my gears too! If it were up to me, I would have called the deal off.

throwaway93382 6y ago

This may be a very specific example, but it all goes back to the number one rule in raising: If you‘re a hot startup, you make the terms. If you‘re in need of money, they make the terms. If anything, focus on growth, revenue and timing so that you‘ve got both good curves in the reports and more than two investor options lined up when it‘s time to raise. Nothing else matters. We lost our biggest client around Series A stage and were strong-armed into a seed stage contract with bad valuation and lots of other unfavorable terms. We signed it because we had to. Two years later, we had managed to get our act back together and had a basically infinite runway through our own revenue. And that power to say no completely turned the dynamics around. The same main investor basically begged us to take more money, so when we wanted to accelerate a bit, we told him we had a last offer for him to invest and left the room with it on the table. He didn‘t even insist on participating LP, as he was so glad to get a small additional piece of that rocket ship. There‘s a million ways to screw founders and just a single way to avoid it: Show traction and the money will find you.

PopeDotNinja 6y ago
Guy Kawasaki says sales fixes everything.
- NoOneNew 6y ago
  You mean have a business that's sustained by the general public and market instead of continous arbitrary funding? What kind of sick psycho are you?

panabee 6y ago

VCs pawning off legal fees on startups is an anachronistic byproduct from when all entrepreneurs lacked power in fundraising. forcing VCs to eat legal fees would lead to standardization and lower costs, which benefits everyone except attorneys. the only way this changes is if top entrepreneurs and VCs commit to a new baseline for legal fees. YC has already started chipping away but cannot break this ridiculous standard on its own. many elements of the VC-founder dynamic are broken today. it will be interesting to see which investors risk crafting a more balanced environment for startups. the downside is alienating their peers and jeopardizing peer-based deal flow, but the upside is attracting more founders and generating goodwill.

joshfraser 6y ago

Early stage deals should be done using standard docs that don't involve lawyers at all. Why should anyone pay 20k to have some legal aids fill in a template? It's insane.

harveyesq 6y ago
Fred Wilson agrees. In his mind you should be able to incorporate, draft and sign series seed documents (no negotiation) for $5K. Although that was said several years ago the same ideal should hold true today in 2020. https://avc.com/2011/03/a-challenge-to-startup-lawyers/ https://avc.com/2011/03/a-challenge-to-startup-lawyers/

supernova87a 6y ago

My observation from having worked for one startup is that there are tons of terms that have the form and appearance of laws and rules that indicate a law-abiding situation. (I mean according to what the public would regard as law-abiding, in hiring, firing, pay, bonuses, profit sharing, etc.) But in fact it is not. They look like rules and laws, but are really just legalese cover for "CEO-does-whatever-he-wants". Such as dilute your value however he pleases when a deal comes around. I suppose in this case it's the VC's cover too. Interesting to see the CEO complaining that he's the one on the wrong end of the stick.

gnicholas 6y ago

> By comparison, the top quartile hourly fees charged by corporate attorneys with 10+ years of experience is $450 per hour I was a seventh year associate at a Silicon Valley law firm when I left for my startup in 2014. At that time, my rate was $600/hr. I'm sure there are cheaper firms out there, but I'm also sure that rates have gone up in the last 6 years. The figures he quotes for the lawyers that were used ($1,200 for partner, $900 for senior associate, etc.) are about what I would expect legal fees to be at a first- or second- tier firm in Silicon Valley these days. Perhaps the $450 number is based on nationwide averages — but if so that's not really relevant to the cost of Silicon Valley lawyers. I know I wouldn't hire a lawyer around here who has 10 years of experience and charges only $450/hr. I'm not quibbling with the major thrust of the article (I'm a startup founder, so I'm all in favor of VCs covering their own legal fees). But when I read the stat above, it made me suspicious because it is so far off from my experience.

harveyesq 6y ago
Yeah the $450 an hour is a national number for all attorneys with over 10 years of experience, as reported by a website called Priori Legal (www.priorilegal.com). Also if you're not hiring a lawyer strictly because he or she is not charging over $450 an hour, I think you're doing it wrong. All due respect.