4 ms·

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

by 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.
    - bdowling 6y ago
      > It matters if the cost is unpredictable But the legal fees for a VC funding round ARE predictable. The article even includes a chart of standard fee caps for various rounds.
      - neltnerb 6y ago
        And then demonstrates how the VC's greater leverage was used to strongarm a startup founder, after the deal was done, to pick up the costs despite an explicit cap as the only thing they insisted on. So it's predictable if you can factor in the risk of whether your VC will attempt to do that I guess. Though if a VC did that to me I think I'd be more inclined to do what one of the examples in the article did and just say, "Nope, nope, if you're trying to screw me over before we even start, we are not starting."
    - jariel 6y ago
      The costs are established as part of the deal, before it's signed. It's part of the nego at least as a cap. The issue here is not 'who pays' because that's not important, the issue here is the scope and cost of the transaction tax. Like HN instituted common safes ... it'd be nice to institute more consistent language for Round A's, but the lawyers are not incented to really do that now are they.
      - neltnerb 6y ago
        The article has an example where despite negotiating caps the vc firm used their greater leverage to force multiple founders to pick up fees beyond the negotiated cap. I am talking about the content of the article, I am not taking about your experience.
  - 6y ago
- icedchai 6y ago
  These sort of legal fees are a tax on every startup and entrepreneur, at the early stage when it matters most. Most of this stuff is boiler plate. They're not re-inventing the wheel for every seed financing. (I'm not saying there aren't exceptions to this.)
beagle3 6y ago
Indeed. Two other situations where this comes up, and in my experience people fail to see this: a) In a standard house (real estate) transaction: One party (Buyer) brings money in. Three parties take money out directly in proportion: Buyer's agent; Seller's agent; Seller. Buyer wants lower price; All others want higher price. That's the payout structure (and the induced incentive structure). It's that simple mathematically. b) In a standard job offer, the employer has a budget to spend; they don't actually care how much of it is "above the line" (employer taxes, 401k matching, employer's contribution to social security) and how much is below (salary, income taxes, employee's contribution). If an item below the line changes (e.g. lower income tax), they won't offer "lower salaries". If an item above the line changes (e.g., lower employer taxes), they will. These changes are not immediate, but they converge rather quickly. Yet, in both cases (as in the VC case), many people fail to see that. You have to have enough detail when doing such evaluations until every change is a zero-sum game between the different players -- and it is only at that point that you can evaluate the merits of a rule.

by jariel 6y ago

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.
  - bdowling 6y ago
    > It matters if the cost is unpredictable But the legal fees for a VC funding round ARE predictable. The article even includes a chart of standard fee caps for various rounds.
    - neltnerb 6y ago
      And then demonstrates how the VC's greater leverage was used to strongarm a startup founder, after the deal was done, to pick up the costs despite an explicit cap as the only thing they insisted on. So it's predictable if you can factor in the risk of whether your VC will attempt to do that I guess. Though if a VC did that to me I think I'd be more inclined to do what one of the examples in the article did and just say, "Nope, nope, if you're trying to screw me over before we even start, we are not starting."
  - jariel 6y ago
    The costs are established as part of the deal, before it's signed. It's part of the nego at least as a cap. The issue here is not 'who pays' because that's not important, the issue here is the scope and cost of the transaction tax. Like HN instituted common safes ... it'd be nice to institute more consistent language for Round A's, but the lawyers are not incented to really do that now are they.
    - neltnerb 6y ago
      The article has an example where despite negotiating caps the vc firm used their greater leverage to force multiple founders to pick up fees beyond the negotiated cap. I am talking about the content of the article, I am not taking about your experience.
- 6y ago
icedchai 6y ago
These sort of legal fees are a tax on every startup and entrepreneur, at the early stage when it matters most. Most of this stuff is boiler plate. They're not re-inventing the wheel for every seed financing. (I'm not saying there aren't exceptions to this.)

beagle3 6y ago

Indeed. Two other situations where this comes up, and in my experience people fail to see this: a) In a standard house (real estate) transaction: One party (Buyer) brings money in. Three parties take money out directly in proportion: Buyer's agent; Seller's agent; Seller. Buyer wants lower price; All others want higher price. That's the payout structure (and the induced incentive structure). It's that simple mathematically. b) In a standard job offer, the employer has a budget to spend; they don't actually care how much of it is "above the line" (employer taxes, 401k matching, employer's contribution to social security) and how much is below (salary, income taxes, employee's contribution). If an item below the line changes (e.g. lower income tax), they won't offer "lower salaries". If an item above the line changes (e.g., lower employer taxes), they will. These changes are not immediate, but they converge rather quickly. Yet, in both cases (as in the VC case), many people fail to see that. You have to have enough detail when doing such evaluations until every change is a zero-sum game between the different players -- and it is only at that point that you can evaluate the merits of a rule.