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Spark Capital will now pay their own legal bills
- pg 13y agoImpressive move by Spark, who have now put other VCs in the awkward position of explaining why they don't do the same.
- msandford 13y agoThe net effect is that they're being more honest about how much they're actually willing to invest, correct? They don't magically have more money and the lawyers have to be paid anyhow. At least it puts the onus on them to keep their negotiations to a minimum.
- chipmunc56 13y agothis. If I give you $8 and ask you to pay me $2 for expenses, or I give you $6 you don't much care. This would only apply to entrepreneurs who don't know that term sheets are less attorney fees.
- mentat 13y agometa: in the interests of continuing intelligent discussion on HN, please just say what you mean instead of "this". It's an infection that's been spreading for at least a few months here.
- danilocampos 13y agoAs long as we're being meta... You responded with 32 words to a 37 word post so that you could quibble about a single word, or 3% of that post. While preaching on the righteous subject of "intelligent discussion," no less. So if we're going to complain about empty calories, I'm pretty sure you're winning that game.
- FuzzyDunlop 13y agoI think you win that, with 54 words nobody needed to read.
- danilocampos 13y agoBut I love empty calories. Look at my comment history.
- icebraining 13y ago"This" (noun): same as "I agree."
- danilocampos 13y agoThat's the problem cited, though. Hacker News, as a community, has developed a comical, pathological aversion to any sort of agreement. Every nit must be picked – otherwise the discussion fails to be "intelligent."
- jacquesm 13y agoindeed. https://news.ycombinator.com/item?id=5603986 https://news.ycombinator.com/item?id=5603986
- danilocampos 13y agoSaid Twain, "never argue with a fool, onlookers may not be able to tell the difference."
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- SkyMarshal 13y ago"This" (noun): superfluous unoriginal internet meme language. Better way: just use your own words, be authentic. Pretend like you're Steve Jobs, and each word you write is your next product.
- vidarh 13y agoI love how you suggest that people should stop behaving the way they are in order to "use your own words, be authentic". How is altering their behaviour in order to satisfy someone on a forum being authentic and using their own words?
- markokocic 13y agoSentence containing only word 'this' is automatic down vote when I see it on HN. Even +1 adds more value IMHO.
- deleted 13y ago[deleted]
- Retric 13y agoTechnicly this also lowers valuations. Which assuming the percentages stay the same is generally a good thing.
- harryh 13y agoThis is exactly right, but I prefer the $6 case because it makes it much more obvious what is going on. We should make the truth obvious whenever possible. Hopefully (as pg points out) the next thing to go is the weird way that employee option pools are handled.
- yebyen 13y agoThe truth is that lawyers are being paid, whether it comes out of your pocket or mine. It's very generous but as a person who has never received a term sheet at all, one way or another I see it as turning another part of the process more opaque. What if I never have to pay another lawyer?
- nwenzel 13y agoActually, that's not entirely true. If lawyers bill inappropriate charges, you don't have to pay those charges. Inappropriate charges include excessive hours, administrative tasks, overhead, or other charges you disallow based on your agreement (commonly called Billing Guidelines). Based on data I've worked with (insurance companies, financial services company, real estate firms) those inappropriate charges are anywhere from 5-15% of the total. Usually 5-10%. The advantage of having the VC pay the legal bills is that they are a bigger fish and can more easily put in place and enforce the legal billing guidelines. Also, as a much more likely repeat customer, the VC will likely get better bills to begin with.
- yebyen 13y agoInteresting... sounds like a problem that might apply too outside of the legal profession.
- pg 13y agoThere are two groups that benefit, portfolio companies and the VCs' LPs. The former get to keep more of the money that's invested, and the latter are no longer being charged for expenses in addition to the management fees they pay. In practice, the startups' own legal expenses will probably also be lower. In the bad old days, lawyers on both sides would engage in a leisurely and expensive back and forth, knowing they'd both get paid out of the amount invested. But if the VCs have to pay their lawyers out of their own management fees, they'll instruct them to make the negotiations fast and simple, which will in turn decrease the billable hours on the startup's side as well.
- msandford 13y agoOkay, so I got it half right. They've made the consumer of services and payer for services the same (themselves) and thus they have the proper incentives. This is a bigger win for the startup ecosystem than I had previously thought.
- not_that_noob 13y agoAbsolutely. Kudos to Spark and I hope the others follow. And PG, thanks for changing the world. You made the currents swirl in a way that in some small way influence all the ripples like this downstream.
- nwenzel 13y agoThe bad old days are still alive and well in insurance and banking. Bankruptcy is even worse. Eight years in the insurance world has shown me that the two biggest law firm "bad behaviors" are excessive billing and multi-party meetings. Both of which, as noted, VCs will be in a stronger position to refuse to pay. I call this version of the principal-agent problem the "new boat problem." When a partner wants a new boat, she/he bills more hours. Even more pumped for YC interview on Sunday after reading the comments.
- larrys 13y agoBefore the other VC's are in that awkward position this would have to reach some kind of critical mass or tipping point. Not only that but different sellers, vendors, sides of business transactions, typically offer different terms, features, benefits. The standard procedure when someone brings up something someone else is willing to do, is to bring up your strong points and why that particular feature shouldn't matter that much as a differentiator. And the truth is how much does this really matter vs. the benefits of the particular VC firm?
- pg 13y agoThat would be true if this were morally neutral. But when you're fixing an abuse that's justified by all participants as being standard practice, the right metaphor is not critical mass but a crack in dam.
- nabeel 13y agoWell put pg. It isn't that the money was that material, it just felt wrong and petty that it was being done in the first place so we wanted to fix it. Just feels silly we didn't do it a lot sooner.
- jacquesm 13y agoIs your fund sales tax exempt? (In other words are you able to deduct sales tax from your earnings before taxes?) If so you may just end up making the tax man happy and reducing the amount you can invest by whatever sales tax applies in your location. Depending on your process costs and deal-flow this could add up over time.
- tptacek 13y agoSales tax?
- darkarmani 13y agoMaybe for catering all of the multiparty meetings?
- tibbon 13y agoIs there any compelling reason (aside from money...) that others won't make the move as well?
- johnrob 13y agoRelated question: will not making this move affect a firm's ability to get good deals? I don't know the answer but it's what the firms should ask themselves.
- downandout 13y agoNot that a traditional VC will ever hand me a term sheet (I wouldn't approach one), but if one did and it specified that I had to pay their legal expenses, I would reject it on principle. It's rather underhanded, and I would immediately begin scouring the paperwork to see what other sleazy tactics they were employing.
- jacquesm 13y agoIf you were in a position to read / sign such a terms sheet then you may want to ask why it specifies that before you reject it out of hand. And you should scour all the paperwork regardless of whether or not that clause was present, even better, have a lawyer that you pay (preferably a competent one) help with the scouring.
- downandout 13y agoOf course anyone would use a lawyer in such a situation. I'm just saying that it is indicative of a hair-splitting, underhanded mentality that would raise immediate red flags about doing business with them in the first place.
- jacquesm 13y ago> indicative of a hair-splitting, underhanded mentality I believe you may be wrong about that. But it appears you've now found a good match in Spark! On the down side, it may then be the only game in town for you, there are good reasons for the 'company pays fees' rule, see elsewhere in this thread for one possible reason.
- downandout 13y agoAs previously stated, I have never and would never approach a traditional VC in the first place for a host of reasons, this being one of them. There is no VC game in town for me, and I am perfectly content with that.
- tptacek 13y ago
- fredwilson 13y agoHi Paul i would prefer to eliminate legal fees entirely by using standard docs and not negotiating them on either side. we have done that many many times and it works great. all you need to do is use a standard template. most law firms have them. this is what i propose on every seed and series A we do. most entrepreneurs take us up on it. and then we don't even use a lawyer on our side. however, there are cases, like one you and i have exchanged emails on recently, where a legal issue comes up that is created by the entrepreneur's counsel, that requires a lot of work and sometimes we end up getting stuck with the bill on it. in situations like that, i like to have the discussion of who should pay the bill up front and on a case by case basis
- fghh45sdfhr3 13y agoHi Fred and Paul! You don't know me. I just wanted to be able to tell people I said hello to you two once :)
- ganeumann 13y agoAs an angel investor, always investing through a syndicate, it's just far easier to have the company pay the bill. But keep in mind that they're paying with the money that the investors give them, and that this is the EXPLICIT deal. When I lead a syndicate deal, I am the person that works with the investors' lawyer to get the deal done. But I'm never the majority of the round (or even the largest single investor.) But being the person who retained the lawyer for the investor group, I am on the hook for the bill. I'm happy doing the work of getting the deal papered, but I wouldn't be happy if I had to pay the whole legal bill when I'm only putting in 10-20% of the round's money. There are two ways to share the expense: 1) I pay the lawyer then go around to the other investors asking them to pay me their piece. Anyone who has ever been saddled with being the payor of the bill for a large group of people at a bar or restaurant knows how this turns out. Some people forget, some people argue that they should pay less, and it's a huge logistical hassle creating nothing but bad feelings. I suppose I could get each investor to sign something saying they would pay me their share, but that's just more legal expense. 2) We up-front tell the company that they are paying the investors' legal bill (last time I did this, the bill was $6k, the cap was $10k: I don't do fancy deals.) The company factors this into their calculation of whether the investment structure is one they want to accept or not. Number 2 is nothing more than a structural convenience. But without it I wouldn't take on the burden of leading deals: it would be more trouble than it's worth (note that, as lead, I get the exact same economic terms as the rest of the group, so I'm essentially doing free work when I'm leading and the other investors get the benefit.) So I'm sticking with having the company pay the legal bill. If we're negotiating a deal and this (or any other term) seems unfair, we need to sit down and talk about it. Once my money is in your bank account and a couple of your stock certificates are under my mattress we're on the same team. We both have a huge incentive to make sure neither of us feels like we've been taken advantage of.
- patio11 13y agoThis is going to be one of those wonderful games of iterated group prisoner's dilemma, in which one member of a formerly functioning cartel has just publicly announced an intention to always play Defect.
- rattray 13y agoWould that imply that, strategically, other investors might wish to avoid co-investing with Spark to punish their defection?
- loganfrederick 13y agoThe thinking from Spark's side might be: -Pay own legal fees, saves portfolio company money -Better terms/relationships with investments attracts more, higher-quality startups -Higher quality startups will likely be the big hits VCs need to be successful -Attracting high quality startups forces other VCs to work with us on future and larger investment rounds
- larrys 13y agoCould also be that the tea leaves (or winds) were reading (blowing) in this direction anyway and they decided to draw first blood in order to make the biggest splash.
- ericb 13y agoTrue, but that also fits within the prisoners dilemma. The way the rewards are set up, you generally should defect if you think your opponent might defect. If it is an iterated prisoners dilemma and you think they will start defecting, you come out ahead if you beat them to it.
- ahc 13y ago+1 for three metaphors in one sentence
- DanBC 13y agoDoesn't paying the legal bills for the other party create some conflicts of interest or other weirdnesses for the lawyers? And why do VCs expect people to pay the legal bills? Who buys the coffee when they go for drinks? --- Also, I'm using Chrome on Win Vista. Here's a screen shot. (http://imgur.com/5DP7C0e http://imgur.com/5DP7C0e) If that's how they wanted it to look, well, fair enough. But I don't think it is. I wonder how much time and effort is spent building style sheets that end up rendering as nasty as the results I got?
- larrys 13y ago"Doesn't paying the legal bills for the other party create some conflicts of interest or other weirdnesses for the lawyers?" This happens quite frequently in insurance defense situations. Say a Physician is hit with malpractice and the insurance company is paying all legal costs. (Or even auto insurance as maybe a better example). The important thing to remember, is that you are the client ("the insured") and even though the person paying the bills will attempt to get you to use an attorney that they have already worked out rates with it is within your right (going along the lines of the point you raised) to get another attorney, within reason, price etc. (The price doesn't have to necessarily be the same either.)
- bsims 13y agoHeard at an event last night that for one company, the legal cost to include UPS as a strategic investor actually exceeded the amount they invested but the company chose to do so in order to access UPS data.
- immad 13y agoI wander if they are paying the $25k from management fees or from the fund. The justification for why VCs don't pay their lawyer bill has always been that they don't want to take the money from their management fees, if Spark has figured out how to take it from their fund and their LPs are okay with that that is good. If not then they are footing $25k from their pocket. But I guess if they only do 10 deals a year their max liability is $250k which isn't bad for a $450m fund.
- SurfScore 13y agoStartups are slowly but surely getting more power/respect when fundraising. This is excellent, and hopefully the "heavy-handed VC oppressor" will go away for good some day...
- tlrobinson 13y agoDoesn't this just mean Spark will have a little less money to actually invest, thus will need to invest at slightly lower valuations to get the same returns, and companies will accept those lower valuations because they no longer have to pay the legal bills? Of course that's a huge simplification, and I'm in favor of reducing sneaky terms that can take entrepreneurs by surprise, so I'm not complaining.
- dopamean 13y agoThis is exactly what I was thinking. Seems like a cost that will be recouped somewhere. Perhaps some startups dont mind that. I don't know enough to have an opinion on its merits. I would imagine some startups may not mind footing the legal bills if it means saving in some other way.
- benmccann 13y agoI think it's also likely to reduce total legal expenditures. The investors previously did not see the legal bill and so their lawyers had less incentive to minimize fees.
- jacquesm 13y agoYou are essentially saying that a VC has no problem saddling up one of their portfolio companies with unnecessary costs, in other words that they are hurting their own interests.
- benmccann 13y agoClearly the VCs have an interest in keeping legal expenditures down. But the extra layer of indirection does not help that goal. E.g. employers, individuals, and insurance companies all have an interest in lowering health costs, but the structure of the market makes it a difficult goal.
- danielweber 13y agoPrincipal-agent problem. The very first thing that popped into my mind, though, was what happened with ArsDigita. I don't think they've agreed to not use the company's money when suing the company's CEO.
- thinkcomp 13y agoMore progressive still would be funding startups that disintermediate lawyers and the billable hour system.
- pg 13y agohttp://techcrunch.com/2013/03/11/yc-backed-clerky-helps-startups-save-time-and-money-on-legal-incorporation-stock-issuance-forms-and-more/ http://techcrunch.com/2013/03/11/yc-backed-clerky-helps-star...
- thinkcomp 13y agoIn my humble opinion this barely scratches the surface. But it is better than not investing, so I hope you and they do well with it. I'm personally interested in projects that flip the incentive structure for people to use lawyers for tasks of all kinds, not just startup-related ones.
- pg 13y agoAll startups start by scratching the surface. Clerky doesn't plan to limit itself to startup deal docs forever.
- nwenzel 13y agoAlternative Fee Arrangements (AFA) are becoming more popular in the insurance world. An insurer will hand over substantially all of their plain vanilla cases in a certain line of business (usually workers comp) in a specified geography to an outside counsel firm. That firm is paid a fixed fee per case, not per hour. To protect the firm, the firm is allowed to "opt-out" of some number of claims each year and bill those claims hourly. Insurers are reporting significant savings. Law firms that get the work are happy. The rest... not so much.
- deleted 13y ago[deleted]
- dcaranda 13y agoBeing entrepreneur friendly is so central to VC marketing that this effort will likely pay itself as a PR expense. Also, transaction fees are typically presented as being deducted from the capital being moved, as opposed to just charging the company. Of course, net it's the same. But language matters.
- mrkurt 13y agoThe number and types of bills we got after closing an A-round was ... illuminating. Background checks on founders, in particular, was not something I would have guessed we'd be billed for.
- jacquesm 13y agoBut did you expect them to do such background checks in the first place?
- mrkurt 13y agoYes, those weren't a surprise.
- jacquesm 13y agoGood. Incidentally, the number of things popping up during such background checks that scuttle a possible deal is quite substantial. It's not so much that there is stuff that was eye-brow raising, it is mostly a breach of trust in terms of disclosure. Sometimes founders are not honest with each other from the get-go, it wouldn't hurt for founders that feel they are in a position to hit one out of the park to have a 'full disclosure' session with each other so they know at least what if any skeletons there are in the various cupboards rather than to have a surprise late stage rejection. Those are generally bad for business.
- rajatsuri 13y agoFinally. Next step: removing the option pool from the pre-money? (as PG has tweeted) Lots of other 'standard' terms that need to be reexamined as well
- downandout 13y agoWhile I've never raised money from traditional VCs, I have raised millions of dollars from angels. Out of more than a dozen angels I've worked with, never once has anyone even contemplated having the company pay the legal fees of the investor. If this is the norm, I'm glad I dislike VCs enough never to have approached them.
- jaredstenquist 13y agoYup, angels and VCs operate quite differently. Same experience here.
- skue 13y agoI've been charged legal fees by an institutional seed stage investor, though the fees were capped -- at an amount equivalent to 2% of total initial investment.
- tomphoolery 13y agoInteresting read, I never knew the founder(s) had to pay VC legal bills just to get the paperwork all situated. Can you...pay the legal fees with the money the VC gave you? :)
- nabeel 13y agoThat is of course exactly what Startups do today. And it feels unfortunate. "Wait, you have me cash just to spend it on your legal bill?"
- nwenzel 13y agoLove that this is #1 on HN and I'm going in for my YC interview on Sunday to explain how we can help insurers, banks, and VCs (and apparently startups) reduce their legal expenses. It's a sign! For a more substantive comment, moving the legal bills into the hands of a "bigger fish" is bad news for law firms. VCs are less likely to be willing to pay for over-billing, unnecessary tasks, and other bad behavior. (shameless plug) VCs, especially those that use my team's software, can save a bundle on legal fees with very little effort.
- jacquesm 13y agoOne simple reason why most VCs don't do this is because they are sales tax exempt and so end up losing up to 21% of the bills to a bookkeeping quirk. So it's easier to pay a bit more out of the fund and end up with a deductible on the side of the company invested in than with a freebie to the tax collectors. In numbers: if a complete process costs $100K and the investment is 2M the fund is out 2.1M. If they pay the bills from the fund directly they're out 2.1M without a sales tax return, if they pay 2.1 to the company and the company pays the bills the company gets back the sales tax so effectively this saves 20K or in this example about 1%. Not much but also not nothing, and if a fund does a lot of smaller deals this sort of thing adds up. Not all funds suffer from this (likely Spark isn't one of them) so the ability of other funds to match this is dependent on whether or not they have classed themselves in such a way that they are sales tax exempt. I'd imagine Spark to be able to offer exactly the legal fees less for the same amount of stock in company 'x' compared to some competitor that does it the usual way so effectively this shouldn't matter but it is excellent publicity for Spark.
- argonaut 13y agoI find this very interesting (and illuminating). I'm a little confused on what you mean by "getting back the sales tax" (probably because all I can think of is the sales tax I get charged when I buy something at the store).
- jacquesm 13y agoFor corporations it works a bit different, depending on your jurisdiction sales tax is either only added at the last stage (business to consumer) or it is added at every stage and returned back to businesses when they do their quarterly or annual tax filings.
- mhp 13y agoHuh? I've paid a lot of legal fees and never remember seeing sales tax on them. I don't understand what you are saying.
- 13y ago
- plusbryan 13y agoSpark have been excellent partners for us over the years at Sincerely. I'd highly recommend them.
- srlake 13y agoSmart guys. Good move. Hell of a great advertising and deal flow move for $25k * X deals per year they do.
- codebeaker 13y agoI always understood that the company receiving the money is supposed to pay it's own fees and use a lawyer that it trusts, without taking money from the VC on grounds that if you use the VC's money, to pay the VC's lawyer, on the VC's terms, you aren't necessarily getting a fair deal. I think paying your own legal fees to an impartial third party is a prudent investment. Perhaps I'm just naïve.
- wpietri 13y agoThe problem they're describing is a little different. Your lawyer always works for you. You pay them with the company's money. Which is also generally investor money. But that's ok; your lawyer will be very clear that they work for the company. (Which, it important to note, is different than working for the founders.) Here, VCs require you to pay their legal expenses for doing the deal. So when the deal closes, they send you a bill for their lawyer. The VC's lawyer definitely knows who they are working for: the VC. One of the problems with this, besides the you-must-be-fucking-kidding-me factor, is that the VC's lawyer has no incentive to keep things quick. The VC has a very slight incentive to speed things along. But if it's coming directly out of the VC's books, then hopefully they'll keep a tighter reign on all the last-minute stuff that somehow hasn't been made standard and turns what you'd think would be an easy thing into a $25k bill.
- robk 13y agoThis is nice for larger funds to do, with fatter management fees. Smaller funds, not so much so. There's not really a structure to take it out of the fund commitment, so this comes out of management fee. Smaller funds don't have this luxury though - if you're running a microcap fund, you simply don't have $250k free in your management fee budget for something like this. That's the salary for another partner really.
- michaelochurch 13y agoI feel like I just read "Women just got the vote" or "Pennsylvania Turnpike will no longer admit horse-drawn carriages" in the newspaper.