Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

The Un-American Rule on VC's Legal Fees

lawofvc.substack.com

Post reply on HN
Print view View original

11–20 of 61 posts

Re: The Un-American Rule on VC's Legal Fees

#11

Post by lmeyerov »

bdowling wrote: post #10

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…

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.

Re: The Un-American Rule on VC's Legal Fees

#12

Post by choppaface »

o_class_star wrote: post #7

It's a cuck test. They want to know up front that you'll take abuse. If you "fail", by standing up for yourself, then they'll just work with some other interchangeable would-be founder who's more of a "culture fit". Legal fees are a rounding error to these companies. It's all about the "power move". They don't want to work with people who'll stand up for themselves over "a measly" $50K.

The article does cite how early VCs seek the legal fees because charging the funds might “mis-align incentives.” Could be phrased many ways, but evidently the fee burden is very much a power issue between VCs and investors, if not founders and VCs.

Re: The Un-American Rule on VC's Legal Fees

#13

Post by simonbarker87 »

o_class_star wrote: post #8
simonbarker87 wrote: post #2

I haven’t read the full article but this feels like a very American thing to me, a more powerful and wealthier party taking advantage of a weaker, dependant party to save the VC partners some money. I’m sure I’ll get downvoted first this, and I know it’s not quite what the title means but yeah paying my VC’s legal fees and having no choice over the firm they used really wound me up.

This is in reference to the American standard business practice ("American Rule") whereby each party to a transaction pays its own legal bills. It is not necessarily connected to the more general American work culture (which I agree is as you characterized it, although I hope that changes with the recent defeat of the final boss of Boomer capitalism).

Yeah, I get what it was in actual reference too, I was just inferring a secondary meaning around American business practices and the Must Win culture that is prevalent in American society.

I like “Boss of the Boomers”

Re: The Un-American Rule on VC's Legal Fees

#14

Post by o_class_star »

simonbarker87 wrote: post #13
o_class_star wrote: post #8

Earlier quoted context omitted.

This is in reference to the American standard business practice ("American Rule") whereby each party to a transaction pays its own legal bills. It is not necessarily connected to the more general American work culture (which I agree is as you characterized it, although I hope that changes with the recent defeat of the final boss of Boomer capitalism).

Yeah, I get what it was in actual reference too, I was just inferring a secondary meaning around American business practices and the Must Win culture that is prevalent in American society. I like “Boss of the Boomers”

The last movement of "Dancing Mad" (FF6) has been playing in my head all week.

Re: The Un-American Rule on VC's Legal Fees

#15

Post by bdowling »

lmeyerov wrote: post #11
bdowling wrote: post #10

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…

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 inefficie…

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.

Re: The Un-American Rule on VC's Legal Fees

#16

Post by simonebrunozzi »

simonbarker87 wrote: post #2

I haven’t read the full article but this feels like a very American thing to me, a more powerful and wealthier party taking advantage of a weaker, dependant party to save the VC partners some money. I’m sure I’ll get downvoted first this, and I know it’s not quite what the title means but yeah paying my VC’s legal fees and having no choice over the firm they used really wound me up.

From the article/blog post:

> The VC industry does not follow the American Rule. The unwritten rule is founders must pay for their own attorneys’ fees, plus their VC’s legal fees, up to a negotiated cap.

So, if you did just read the first few sentences, you would have known why the author claims this aspect to be un-American.

Re: The Un-American Rule on VC's Legal Fees

#17

Post by xxpor »

kenrose wrote: post #5

“it’s strange how legal fees are just under the cap or way over the cap with copious discounts, but we never see legal fees significantly under.” Correct. My own experience: whatever value you negotiate the legal cap on your term sheet, that’s the bill you get.

We see this time and time again in the US. Another example just off the top of my head: College tuition goes up the maximum amount the feds will pay in student aid (loans, pell grants, etc).

It's perfectly rational, but it's not necessarily the best.

Re: The Un-American Rule on VC's Legal Fees

#18

Post by snaily »

ButWhatFor wrote: post #9
o_class_star wrote: post #7

It's a cuck test. They want to know up front that you'll take abuse. If you "fail", by standing up for yourself, then they'll just work with some other interchangeable would-be founder who's more of a "culture fit". Legal fees are a rounding error to these companies. It's all about the "power move". They don't want to work with people who'll stand up for themselves over "a measly" $50K.

I’m laughing too much at this. Agree “I’m making a $15mm investment I need you to cover my up to $100k in legal fees. If you can’t do that, deal off.” Has always sounded funny to me. But if you need money it’s just one of those things you have to do. I think what should happen is the whole syndicate should share in total legal fees pro-rata or something. That way the lead isn’t wearing all the legal fees. Also think…

For an institutional fund, they can be different, non-fungible pools of capital. The $15M comes from fund limited partner (LP) commitments as part of the investable capital of the fund (i.e. was earmarked for investments and is not the fund manager's money, in a very real sense), but the $100k might (depending on the LP agreement for the fund) come out of the management fees, and if so, is very much part of the P&L for the fund manager.

For a corporate VC, its typically all the same pool, though.

Re: The Un-American Rule on VC's Legal Fees

#19

Post by murbard2 »

It matters only up to the amount of transaction costs involved in negotiating the clause which is not 0 but not something to get in a tizzy about either. VCs need companies to fund just as much as the companies need capital.

This is the mainstream economic view. Yes, you'll find scores of economic papers finding that "power dynamics" actually matter in negotiated agreements, but understand that they are published precisely because they purport to show departure from the consensus baseline which is that they really don't.

https://en.wikipedia.org/wiki/Coase_theorem.

Re: The Un-American Rule on VC's Legal Fees

#20

Post by jariel »

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.

Post reply on HN