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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 j

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.
- simonebrunozzi 6y ago
  No, you are not listening (reading) his point. He is 100% right, from my point of view at least. Please read it again. And now, an example: Startup A has two co-founders, Simon and John. 50% equity each. Startup A accepts an investment from VC B: $2M at a $10M post-money. VC should get 20%. First weird thing: oh, wait: the employee pool needs to be carved out. It's 20%. So you have 20% employee pool, 30% Simon, 30% John, and 20% VC B. Second weird thing (why you're wrong): wait, there's a 100k legal fee that the company will pay. Cash is now $1.9M. So the VC effectively paid $1.9M for a 20% stake, or a post-money valuation of $9.5M. Instead of $10M. (the part about the employee pool might be irrelevant here; but I had to mention it because it's, in my view, akin to the weird thing about legal fees).
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.)

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.
simonebrunozzi 6y ago
No, you are not listening (reading) his point. He is 100% right, from my point of view at least. Please read it again. And now, an example: Startup A has two co-founders, Simon and John. 50% equity each. Startup A accepts an investment from VC B: $2M at a $10M post-money. VC should get 20%. First weird thing: oh, wait: the employee pool needs to be carved out. It's 20%. So you have 20% employee pool, 30% Simon, 30% John, and 20% VC B. Second weird thing (why you're wrong): wait, there's a 100k legal fee that the company will pay. Cash is now $1.9M. So the VC effectively paid $1.9M for a 20% stake, or a post-money valuation of $9.5M. Instead of $10M. (the part about the employee pool might be irrelevant here; but I had to mention it because it's, in my view, akin to the weird thing about legal fees).

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.)