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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

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.
    - mtnGoat 6y ago
      Are you claiming the market cost for a developer is $300k.
      - lmeyerov 6y ago
        See: https://www.levels.fyi/# https://www.levels.fyi/# Most VC-funded co's are bay area, so I was guessing $140K base + $100K RSUs (which are effectively cash) => $240K based on what I recalled about big companies here. But looks like $260K for someone just a few years in (L4) and $350K for folks senior enough to be real leads (L5). Funded co's are the top 1%, so that's arguably some $600K folks (L6). Also, I didn't adjust for being in a top 1 market (bay area) or 2nd tier (nyc/seattle/austin/...) vs Other. But either way, yeah, you're right, > 50% discount for those #'s ;-)
        mtnGoat 6y ago
        I would say most of the companies on levels are not in the same league as your average startup and do not attract the same talent nor need to pay so well. You can't measure on average only on the top tier, and to compete with it would be foolish IMHO.
        lmeyerov 6y ago
        Only 0.5-1% of startups get picked for VC funding, and even less to Series A etc., so there is a bit of a weeder on that side. On the other side, with multiple top tech companies being 100K+ employees, being at one long enough to lead a team or project is not that selective. I do agree that competing based on compensation is generally foolish, with only exceptions like being funded by the top 1% of VCs who like to compete by overspending. Hence, 50% paycut.
paul_f 6y ago
This may be true, however, the investors pick the lawyers and the lawyers work for the investors. The investors manage their work, controlling how much is spent. The investors have limited incentive to keep the costs down.

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.
  - mtnGoat 6y ago
    Are you claiming the market cost for a developer is $300k.
    - lmeyerov 6y ago
      See: https://www.levels.fyi/# https://www.levels.fyi/# Most VC-funded co's are bay area, so I was guessing $140K base + $100K RSUs (which are effectively cash) => $240K based on what I recalled about big companies here. But looks like $260K for someone just a few years in (L4) and $350K for folks senior enough to be real leads (L5). Funded co's are the top 1%, so that's arguably some $600K folks (L6). Also, I didn't adjust for being in a top 1 market (bay area) or 2nd tier (nyc/seattle/austin/...) vs Other. But either way, yeah, you're right, > 50% discount for those #'s ;-)
      - mtnGoat 6y ago
        I would say most of the companies on levels are not in the same league as your average startup and do not attract the same talent nor need to pay so well. You can't measure on average only on the top tier, and to compete with it would be foolish IMHO.
        lmeyerov 6y ago
        Only 0.5-1% of startups get picked for VC funding, and even less to Series A etc., so there is a bit of a weeder on that side. On the other side, with multiple top tech companies being 100K+ employees, being at one long enough to lead a team or project is not that selective. I do agree that competing based on compensation is generally foolish, with only exceptions like being funded by the top 1% of VCs who like to compete by overspending. Hence, 50% paycut.

paul_f 6y ago

This may be true, however, the investors pick the lawyers and the lawyers work for the investors. The investors manage their work, controlling how much is spent. The investors have limited incentive to keep the costs down.