Funny how "convention", "tradition", "standard terms", and "the way things have always been done" invariably break in VCs' favor. $10k of legal fees is small potatoes but I hate the unbridled arrogance that says taking note of that is somehow being greedy but insisting on its presence is simply being a gentleman.
Term Sheet Negotiation Tells
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Re: Term Sheet Negotiation Tells
#12> One founder wanted to negotiate out of having to pay $10K in lawyer fees. Are these fees for the VC's due diligence investigation, or are they for putting together good paperwork for the company? For the former, the company has just bartered legal services and needs to issue an IRS form 1099 to the VC who has to pay taxes, and may be committing securities fraud by colluding to book the fees as basis cost rather tha…
Neither. The proper way to book merger-and-acquisition-related legal fees (along with other non-recurring professional fees related to the transaction) is as part of the basis cost of aquiring the stock. This increased basis cost is not reflected on the seller's side as increased purchase price. Indeed, this is how legal fees related to the acquisition of any capital asset would be booked by a company. It's all part…
Indeed. So why do VCs want to stuff the expenses inside the corporation?
Re: Term Sheet Negotiation Tells
#13All contracts (including Term Sheets for early financing) are simply a manifestation of the parties' expectations. At the end of the day, relationships are more important. How often are these term sheets enforced anyway?
Re: Term Sheet Negotiation Tells
#14All contracts (including Term Sheets for early financing) are simply a manifestation of the parties' expectations. At the end of the day, relationships are more important. How often are these term sheets enforced anyway?
>> How often are these term sheets enforced anyway?
The term sheet is handed to the lawyers as a template for the contract. The odds of the contract being more beneficial to the founder than the term sheet is infinitesimal. The odds of there being clauses in the contract making it less beneficial to the founder than the term sheet is significant.
Re: Term Sheet Negotiation Tells
#15All contracts (including Term Sheets for early financing) are simply a manifestation of the parties' expectations. At the end of the day, relationships are more important. How often are these term sheets enforced anyway?
>> How often are these term sheets enforced anyway? Virtually every time. Nothing is ever going to turn out better for the founder than what you see on the term sheet. The term sheet is handed to the lawyers as a template for the contract. The odds of the contract being more beneficial to the founder than the term sheet is infinitesimal. The odds of there being clauses in the contract making it less beneficial to the…
OK, but by "enforce", I meant "is the basis of a valid, colorable claim in court that ultimately prevails". IMO, that's the best measure of the paper's value/importance.
Re: Term Sheet Negotiation Tells
#16Earlier quoted context omitted.
Neither. The proper way to book merger-and-acquisition-related legal fees (along with other non-recurring professional fees related to the transaction) is as part of the basis cost of aquiring the stock. This increased basis cost is not reflected on the seller's side as increased purchase price. Indeed, this is how legal fees related to the acquisition of any capital asset would be booked by a company. It's all part…
Indeed. So why do VCs want to stuff the expenses inside the corporation?
Because recording an increased basis price means that they need to sell the stock for a higher amount to realize a gain (i.e., a profit).
Individual VCs (i.e., angels) would prefer that, b/c it means lower taxable income. However, VC firms prefer the appearance of profitability, so every cost they don't have to take on themselves makes their fund look better.