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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 '

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.
        bdowling 6y ago
        >> Funded co's are the top 1%, so that's arguably some $600K folks (L6) > Only 0.5-1% of startups get picked for VC funding This is a big misunderstanding. The rate at which pitches get picked up for funding is not related to the rank of the engineers that the startup would hire. Startup engineers tend to be either younger and inexperienced or experienced, but average (i.e., not top-earners at big tech). In either case, they are risk-seekers who are willing to take lower salaries in exchange for equity with a slim chance at making it big. Startups are, generally speaking, under strict financial pressure. They usually can’t afford to pay market rate, let alone big tech (“We need the best people in the industry at any cost”) rates.
  - bdowling 6y ago
    If a startup fails to raise a series A round because it was 5% underfunded at the seed stage, then it was never going to succeed.
    - lmeyerov 6y ago
      It's not the highest-order bit for knocking it out of the park, but is already material for daily operations and for one of the biggest factors: team. Scoffing at $50K on $1M means the investor doesn't truly get early stage basics like payroll & compounding. Demanding lazy lawyer fees is explicitly asking to be a "partner" that eats the seed corn, and starts doing it even before anything is signed. The investor ultimately doesn't care because they win when 9 portfolio co's fail and only the 10th nails it. In contrast, founders only have one company, and it can only burn $10-50K on stupid contracts so many times before payroll breaks, and each time is at the expense of compounding effects.
      - bdowling 6y ago
        The founders and investors are both interested in the company being adequately funded to reach its next stage. So if the founders’ plan requires an extra $50k, then they should ask for more money. If the investor doesn’t want to give it to them, then maybe they should find a different investor or change their plan.
        lmeyerov 6y ago
        I think I touched a nerve ;-) Founders want to do the most with what they can in their one shot, while investors can play faster and looser across their portfolio, such as burning $50K here on nonsense. Not all, but enough that this article + thread exists.

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.
        bdowling 6y ago
        >> Funded co's are the top 1%, so that's arguably some $600K folks (L6) > Only 0.5-1% of startups get picked for VC funding This is a big misunderstanding. The rate at which pitches get picked up for funding is not related to the rank of the engineers that the startup would hire. Startup engineers tend to be either younger and inexperienced or experienced, but average (i.e., not top-earners at big tech). In either case, they are risk-seekers who are willing to take lower salaries in exchange for equity with a slim chance at making it big. Startups are, generally speaking, under strict financial pressure. They usually can’t afford to pay market rate, let alone big tech (“We need the best people in the industry at any cost”) rates.
- bdowling 6y ago
  If a startup fails to raise a series A round because it was 5% underfunded at the seed stage, then it was never going to succeed.
  - lmeyerov 6y ago
    It's not the highest-order bit for knocking it out of the park, but is already material for daily operations and for one of the biggest factors: team. Scoffing at $50K on $1M means the investor doesn't truly get early stage basics like payroll & compounding. Demanding lazy lawyer fees is explicitly asking to be a "partner" that eats the seed corn, and starts doing it even before anything is signed. The investor ultimately doesn't care because they win when 9 portfolio co's fail and only the 10th nails it. In contrast, founders only have one company, and it can only burn $10-50K on stupid contracts so many times before payroll breaks, and each time is at the expense of compounding effects.
    - bdowling 6y ago
      The founders and investors are both interested in the company being adequately funded to reach its next stage. So if the founders’ plan requires an extra $50k, then they should ask for more money. If the investor doesn’t want to give it to them, then maybe they should find a different investor or change their plan.
      - lmeyerov 6y ago
        I think I touched a nerve ;-) Founders want to do the most with what they can in their one shot, while investors can play faster and looser across their portfolio, such as burning $50K here on nonsense. Not all, but enough that this article + thread exists.