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Spark Capital will now pay their own legal bills

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Re: Spark Capital will now pay their own legal bills

#71

Post by skue »

jacquesm wrote: post #50

One simple reason why most VCs don't do this is because they are sales tax exempt and so end up losing up to 21% of the bills to a bookkeeping quirk. So it's easier to pay a bit more out of the fund and end up with a deductible on the side of the company invested in than with a freebie to the tax collectors. In numbers: if a complete process costs $100K and the investment is 2M the fund is out 2.1M. If they pay the b…

While there are some US states that have considered taxing legal fees, this is certainly not the norm. Services are typically exempt from sales tax. From page 19 of California's guide to sales/use tax exemptions:

> SERVICES—The sale of services where no tangible personal property is transferred or where the transfer of property is incidental, are not subject to sales and use taxes.

Source: http://www.boe.ca.gov/pdf/pub61.pdf

Re: Spark Capital will now pay their own legal bills

#72

Post by skue »

downandout wrote: post #39

While I've never raised money from traditional VCs, I have raised millions of dollars from angels. Out of more than a dozen angels I've worked with, never once has anyone even contemplated having the company pay the legal fees of the investor. If this is the norm, I'm glad I dislike VCs enough never to have approached them.

I've been charged legal fees by an institutional seed stage investor, though the fees were capped -- at an amount equivalent to 2% of total initial investment.

Re: Spark Capital will now pay their own legal bills

#73

Post by mjn »

jacquesm wrote: post #53
downandout wrote: post #41

Earlier quoted context omitted.

Not that a traditional VC will ever hand me a term sheet (I wouldn't approach one), but if one did and it specified that I had to pay their legal expenses, I would reject it on principle. It's rather underhanded, and I would immediately begin scouring the paperwork to see what other sleazy tactics they were employing.

If you were in a position to read / sign such a terms sheet then you may want to ask why it specifies that before you reject it out of hand. And you should scour all the paperwork regardless of whether or not that clause was present, even better, have a lawyer that you pay (preferably a competent one) help with the scouring.

It would be particularly odd to reject it over solely that, because it's just a fixed-dollar difference. One easy way to overcome a finite difference in one part of a term sheet is to offer more dollars in another part.

All Spark is doing here is offering to cover the first $25k of legal expenses. The startup is still liable for anything above that. That's an offer worth at most $25k in additional implied investment, relative to the case where they asked the startup to cover all legal fees. Actuarially, probably somewhat lower than $25k. So maybe you should value the offer at $15k. Not nothing, but not worth overriding everything else.

Re: Spark Capital will now pay their own legal bills

#74

Post by darkarmani »

tptacek wrote: post #64
jacquesm wrote: post #60

Earlier quoted context omitted.

Is your fund sales tax exempt? (In other words are you able to deduct sales tax from your earnings before taxes?) If so you may just end up making the tax man happy and reducing the amount you can invest by whatever sales tax applies in your location. Depending on your process costs and deal-flow this could add up over time.

Sales tax?

Maybe for catering all of the multiparty meetings?

Re: Spark Capital will now pay their own legal bills

#75

Post by jpeg_hero »

jacquesm wrote: post #50

One simple reason why most VCs don't do this is because they are sales tax exempt and so end up losing up to 21% of the bills to a bookkeeping quirk. So it's easier to pay a bit more out of the fund and end up with a deductible on the side of the company invested in than with a freebie to the tax collectors. In numbers: if a complete process costs $100K and the investment is 2M the fund is out 2.1M. If they pay the b…

You mean VAT in EU?

Re: Spark Capital will now pay their own legal bills

#76

Post by dllthomas »

icebraining wrote: post #49
mentat wrote: post #14

Earlier quoted context omitted.

meta: in the interests of continuing intelligent discussion on HN, please just say what you mean instead of "this". It's an infection that's been spreading for at least a few months here.

"This" (noun): same as "I agree."

I thought it was short for "This [is something I think people should pay attention to]."

Re: Spark Capital will now pay their own legal bills

#77

Post by greghinch »

downandout wrote: post #41
pg wrote: post #2

Impressive move by Spark, who have now put other VCs in the awkward position of explaining why they don't do the same.

Not that a traditional VC will ever hand me a term sheet (I wouldn't approach one), but if one did and it specified that I had to pay their legal expenses, I would reject it on principle. It's rather underhanded, and I would immediately begin scouring the paperwork to see what other sleazy tactics they were employing.

Considering how much time and work (3 months of back and forth on DD is not uncommon) it takes you to get to the point of getting a term sheet, I doubt it. Doubled by the fact that, until this posting, every VC I've heard of asks you to pay legal fees.

Now some add other fees on as well. This is considered less scrupulous and should be rejected. But to make things easy, ask about fees up front, not when you are getting a term sheet.

Re: Spark Capital will now pay their own legal bills

#79

Post by thinkcomp »

pg wrote: post #35
thinkcomp wrote: post #21

More progressive still would be funding startups that disintermediate lawyers and the billable hour system.

http://techcrunch.com/2013/03/11/yc-backed-clerky-helps-star...

In my humble opinion this barely scratches the surface. But it is better than not investing, so I hope you and they do well with it.

I'm personally interested in projects that flip the incentive structure for people to use lawyers for tasks of all kinds, not just startup-related ones.

Re: Spark Capital will now pay their own legal bills

#80

Post by mrkurt »

jacquesm wrote: post #61
mrkurt wrote: post #33

The number and types of bills we got after closing an A-round was ... illuminating. Background checks on founders, in particular, was not something I would have guessed we'd be billed for.

But did you expect them to do such background checks in the first place?

Yes, those weren't a surprise.
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