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The Un-American Rule on VC's Legal Fees

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

#31

Post by jariel »

neltnerb wrote: post #29
jariel wrote: post #20

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…

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.

You're missing my point.

" it ends up being a discount on the equity they just purchased." 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.

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

#32

Post by supernova87a »

My observation from having worked for one startup is that there are tons of terms that have the form and appearance of laws and rules that indicate a law-abiding situation. (I mean according to what the public would regard as law-abiding, in hiring, firing, pay, bonuses, profit sharing, etc.)

But in fact it is not. They look like rules and laws, but are really just legalese cover for "CEO-does-whatever-he-wants". Such as dilute your value however he pleases when a deal comes around. I suppose in this case it's the VC's cover too.

Interesting to see the CEO complaining that he's the one on the wrong end of the stick.

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

#33

Post by preinheimer »

zb1plus wrote: post #6

Honestly, if I ever start a SaaS company, I'd rather just bootstrap from a developing country than deal with the hassle of messing with VCs. It doesn't seem worth it unless you are in an industry that requires a heavy capital investment to get off the ground.

If you end up in that boat check out the Microconf community. It's full of folks who have made that call.

https://microconf.com/

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

#34

Post by icedchai »

neltnerb wrote: post #29
jariel wrote: post #20

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…

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.

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.)

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

#35

Post by NoOneNew »

PopeDotNinja wrote: post #27
throwaway93382 wrote: post #24

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…

Guy Kawasaki says sales fixes everything.

You mean have a business that's sustained by the general public and market instead of continous arbitrary funding? What kind of sick psycho are you?

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

#36

Post by lmeyerov »

bdowling wrote: post #15
lmeyerov wrote: post #11

Earlier quoted context omitted.

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.

quick little numbers experiment:

$1M seed for 18mo for luring folks at ~50% below market at 150K fully loaded (120K salary + 30K overhead) => 4.5 people

All of a sudden, $50K might mean the difference between starting with 4 vs 5 people, which is a 25% difference in team. Or with 5 vs 6, which is 20%.

So..... yeah.

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

#37

Post by neltnerb »

jariel wrote: post #31
neltnerb wrote: post #29

Earlier quoted context omitted.

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.

You're missing my point. " it ends up being a discount on the equity they just purchased." 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 w…

It matters if the cost is unpredictable and only one side can control how much it comes to. The information isn't symmetric.

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

#38

Post by mtnGoat »

lmeyerov wrote: post #36
bdowling wrote: post #15

Earlier quoted context omitted.

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.

quick little numbers experiment: $1M seed for 18mo for luring folks at ~50% below market at 150K fully loaded (120K salary + 30K overhead) => 4.5 people All of a sudden, $50K might mean the difference between starting with 4 vs 5 people, which is a 25% difference in team. Or with 5 vs 6, which is 20%. So..... yeah.

Are you claiming the market cost for a developer is $300k.

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

#39

Post by lmeyerov »

mtnGoat wrote: post #38
lmeyerov wrote: post #36

Earlier quoted context omitted.

quick little numbers experiment: $1M seed for 18mo for luring folks at ~50% below market at 150K fully loaded (120K salary + 30K overhead) => 4.5 people All of a sudden, $50K might mean the difference between starting with 4 vs 5 people, which is a 25% difference in team. Or with 5 vs 6, which is 20%. So..... yeah.

Are you claiming the market cost for a developer is $300k.

See: https://www.levels.fyi/#

Most VC-funded co's are bay area, so I was guessing $140K base + $100K RSUs (which are effectively cash) => $240K based on what I recalled about big companies here. But looks like $260K for someone just a few years in (L4) and $350K for folks senior enough to be real leads (L5). Funded co's are the top 1%, so that's arguably some $600K folks (L6). Also, I didn't adjust for being in a top 1 market (bay area) or 2nd tier (nyc/seattle/austin/...) vs Other. But either way, yeah, you're right, > 50% discount for those #'s ;-)

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

#40

Post by bdowling »

lmeyerov wrote: post #36
bdowling wrote: post #15

Earlier quoted context omitted.

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.

quick little numbers experiment: $1M seed for 18mo for luring folks at ~50% below market at 150K fully loaded (120K salary + 30K overhead) => 4.5 people All of a sudden, $50K might mean the difference between starting with 4 vs 5 people, which is a 25% difference in team. Or with 5 vs 6, which is 20%. So..... yeah.

If a startup fails to raise a series A round because it was 5% underfunded at the seed stage, then it was never going to succeed.
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