The Un-American Rule on VC's Legal Fees

I was a seventh year associate at a Silicon Valley law firm when I left for my startup in 2014. At that time, my rate was $600/hr. I'm sure there are cheaper firms out there, but I'm also sure that rates have gone up in the last 6 years. The figures he quotes for the lawyers that were used ($1,200 for partner, $900 for senior associate, etc.) are about what I would expect legal fees to be at a first- or second- tier firm in Silicon Valley these days.

Perhaps the $450 number is based on nationwide averages — but if so that's not really relevant to the cost of Silicon Valley lawyers. I know I wouldn't hire a lawyer around here who has 10 years of experience and charges only $450/hr.

I'm not quibbling with the major thrust of the article (I'm a startup founder, so I'm all in favor of VCs covering their own legal fees). But when I read the stat above, it made me suspicious because it is so far off from my experience.

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.

a) In a standard house (real estate) transaction: One party (Buyer) brings money in. Three parties take money out directly in proportion: Buyer's agent; Seller's agent; Seller. Buyer wants lower price; All others want higher price. That's the payout structure (and the induced incentive structure). It's that simple mathematically.

b) In a standard job offer, the employer has a budget to spend; they don't actually care how much of it is "above the line" (employer taxes, 401k matching, employer's contribution to social security) and how much is below (salary, income taxes, employee's contribution). If an item below the line changes (e.g. lower income tax), they won't offer "lower salaries". If an item above the line changes (e.g., lower employer taxes), they will. These changes are not immediate, but they converge rather quickly.

Yet, in both cases (as in the VC case), many people fail to see that. You have to have enough detail when doing such evaluations until every change is a zero-sum game between the different players -- and it is only at that point that you can evaluate the merits of a rule.

"The American Rule" is a reference to a norm in law that your opponent pays for their own legal fees, and you pay for yours. See https://en.m.wikipedia.org/wiki/American_rule_(attorney%27s_...

Compare this internationally:

• The English rule is used, under which the losing party pays the prevailing party's attorneys' fees.

So the American rule is that each party bear their own costs of litigation.

Contracts allow parties to fee shift. Although the article equates fee splitting as the American rule, there's technically no such rule for transactions, but it does represent the general American sentiment on the subject, which is that parties should bear their own costs. Requiring the weaker party in a transaction to shoulder the financial load of a dominant party may be a common capitalistic practice, but it's not an American ideal.

In his mind you should be able to incorporate, draft and sign series seed documents (no negotiation) for $5K. Although that was said several years ago the same ideal should hold true today in 2020. https://avc.com/2011/03/a-challenge-to-startup-lawyers/