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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.
Frank again disagreed and so I made him an offer: If his client promised that it would charge no more than $15K in attorneys’ fees, then we would agree to use the NVCA forms. Frank agreed, but on the condition that we draft the forms.
Although we had secured a legally enforceable right that no more than $15K in attorneys’ fees would be charged to my client, it didn’t matter. True to form, the IPO deal team ran a heavy due diligence over the next six weeks and amassed a six-figure legal fee. To get the deal done, my client was told it had to cover at least half the deal team’s fee, at which this point was well over six figures. They said the “$15K was a mistake” and the “spirit of the deal was always to cover half of our legal fees.” What’s ironic was that we had only one enforceable term in the term sheet and it was the $15K fee cap.
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…
If anything, focus on growth, revenue and timing so that you‘ve got both good curves in the reports and more than two investor options lined up when it‘s time to raise. Nothing else matters.
We lost our biggest client around Series A stage and were strong-armed into a seed stage contract with bad valuation and lots of other unfavorable terms. We signed it because we had to.
Two years later, we had managed to get our act back together and had a basically infinite runway through our own revenue. And that power to say no completely turned the dynamics around.
The same main investor basically begged us to take more money, so when we wanted to accelerate a bit, we told him we had a last offer for him to invest and left the room with it on the table.
He didn‘t even insist on participating LP, as he was so glad to get a small additional piece of that rocket ship.
There‘s a million ways to screw founders and just a single way to avoid it: Show traction and the money will find you.
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.
That is the reputation.
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.
Would you claim that European rich groups don't toss their weight around?
This may be a very specific example, but it all goes back to the number one rule in raising: If you‘re a hot startup, you make the terms. If you‘re in need of money, they make the terms. If anything, focus on growth, revenue and timing so that you‘ve got both good curves in the reports and more than two investor options lined up when it‘s time to raise. Nothing else matters. We lost our biggest client around Series A…
forcing VCs to eat legal fees would lead to standardization and lower costs, which benefits everyone except attorneys.
the only way this changes is if top entrepreneurs and VCs commit to a new baseline for legal fees. YC has already started chipping away but cannot break this ridiculous standard on its own.
many elements of the VC-founder dynamic are broken today. it will be interesting to see which investors risk crafting a more balanced environment for startups. the downside is alienating their peers and jeopardizing peer-based deal flow, but the upside is attracting more founders and generating goodwill.
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 t…
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.