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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

#51

Post by mtnGoat »

lmeyerov wrote: post #39
mtnGoat wrote: post #38

Earlier quoted context omitted.

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…

I would say most of the companies on levels are not in the same league as your average startup and do not attract the same talent nor need to pay so well.

You can't measure on average only on the top tier, and to compete with it would be foolish IMHO.

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

#52

Post by lmeyerov »

mtnGoat wrote: post #51
lmeyerov wrote: post #39

Earlier quoted context omitted.

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…

I would say most of the companies on levels are not in the same league as your average startup and do not attract the same talent nor need to pay so well. You can't measure on average only on the top tier, and to compete with it would be foolish IMHO.

Only 0.5-1% of startups get picked for VC funding, and even less to Series A etc., so there is a bit of a weeder on that side. On the other side, with multiple top tech companies being 100K+ employees, being at one long enough to lead a team or project is not that selective.

I do agree that competing based on compensation is generally foolish, with only exceptions like being funded by the top 1% of VCs who like to compete by overspending. Hence, 50% paycut.

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

#53

Post by neltnerb »

bdowling wrote: post #42
neltnerb wrote: post #37

Earlier quoted context omitted.

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

> It matters if the cost is unpredictable But the legal fees for a VC funding round ARE predictable. The article even includes a chart of standard fee caps for various rounds.

And then demonstrates how the VC's greater leverage was used to strongarm a startup founder, after the deal was done, to pick up the costs despite an explicit cap as the only thing they insisted on.

So it's predictable if you can factor in the risk of whether your VC will attempt to do that I guess. Though if a VC did that to me I think I'd be more inclined to do what one of the examples in the article did and just say, "Nope, nope, if you're trying to screw me over before we even start, we are not starting."

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

#54

Post by lmeyerov »

bdowling wrote: post #40
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.

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.

It's not the highest-order bit for knocking it out of the park, but is already material for daily operations and for one of the biggest factors: team. Scoffing at $50K on $1M means the investor doesn't truly get early stage basics like payroll & compounding. Demanding lazy lawyer fees is explicitly asking to be a "partner" that eats the seed corn, and starts doing it even before anything is signed.

The investor ultimately doesn't care because they win when 9 portfolio co's fail and only the 10th nails it. In contrast, founders only have one company, and it can only burn $10-50K on stupid contracts so many times before payroll breaks, and each time is at the expense of compounding effects.

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

#55

Post by bdowling »

lmeyerov wrote: post #54
bdowling wrote: post #40

Earlier quoted context omitted.

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.

It's not the highest-order bit for knocking it out of the park, but is already material for daily operations and for one of the biggest factors: team. Scoffing at $50K on $1M means the investor doesn't truly get early stage basics like payroll & compounding. Demanding lazy lawyer fees is explicitly asking to be a "partner" that eats the seed corn, and starts doing it even before anything is signed. The investor ultim…

The founders and investors are both interested in the company being adequately funded to reach its next stage. So if the founders’ plan requires an extra $50k, then they should ask for more money. If the investor doesn’t want to give it to them, then maybe they should find a different investor or change their plan.

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

#56

Post by bdowling »

lmeyerov wrote: post #52
mtnGoat wrote: post #51

Earlier quoted context omitted.

I would say most of the companies on levels are not in the same league as your average startup and do not attract the same talent nor need to pay so well. You can't measure on average only on the top tier, and to compete with it would be foolish IMHO.

Only 0.5-1% of startups get picked for VC funding, and even less to Series A etc., so there is a bit of a weeder on that side. On the other side, with multiple top tech companies being 100K+ employees, being at one long enough to lead a team or project is not that selective. I do agree that competing based on compensation is generally foolish, with only exceptions like being funded by the top 1% of VCs who like to co…

>> Funded co's are the top 1%, so that's arguably some $600K folks (L6) > Only 0.5-1% of startups get picked for VC funding

This is a big misunderstanding. The rate at which pitches get picked up for funding is not related to the rank of the engineers that the startup would hire. Startup engineers tend to be either younger and inexperienced or experienced, but average (i.e., not top-earners at big tech). In either case, they are risk-seekers who are willing to take lower salaries in exchange for equity with a slim chance at making it big. Startups are, generally speaking, under strict financial pressure. They usually can’t afford to pay market rate, let alone big tech (“We need the best people in the industry at any cost”) rates.

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

#57

Post by lmeyerov »

bdowling wrote: post #56
lmeyerov wrote: post #52

Earlier quoted context omitted.

Only 0.5-1% of startups get picked for VC funding, and even less to Series A etc., so there is a bit of a weeder on that side. On the other side, with multiple top tech companies being 100K+ employees, being at one long enough to lead a team or project is not that selective. I do agree that competing based on compensation is generally foolish, with only exceptions like being funded by the top 1% of VCs who like to co…

>> Funded co's are the top 1%, so that's arguably some $600K folks (L6) > Only 0.5-1% of startups get picked for VC funding This is a big misunderstanding. The rate at which pitches get picked up for funding is not related to the rank of the engineers that the startup would hire. Startup engineers tend to be either younger and inexperienced or experienced, but average (i.e., not top-earners at big tech). In either ca…

That's a hell of a claim I'd be curious to see backed up. In a sense, one of the first tests for a funded founder is hiring folks at below-market (my initial 50% estimate) who still outperform others.

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

#58

Post by lmeyerov »

bdowling wrote: post #55
lmeyerov wrote: post #54

Earlier quoted context omitted.

It's not the highest-order bit for knocking it out of the park, but is already material for daily operations and for one of the biggest factors: team. Scoffing at $50K on $1M means the investor doesn't truly get early stage basics like payroll & compounding. Demanding lazy lawyer fees is explicitly asking to be a "partner" that eats the seed corn, and starts doing it even before anything is signed. The investor ultim…

The founders and investors are both interested in the company being adequately funded to reach its next stage. So if the founders’ plan requires an extra $50k, then they should ask for more money. If the investor doesn’t want to give it to them, then maybe they should find a different investor or change their plan.

I think I touched a nerve ;-) Founders want to do the most with what they can in their one shot, while investors can play faster and looser across their portfolio, such as burning $50K here on nonsense. Not all, but enough that this article + thread exists.

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

#59

Post by bdowling »

lmeyerov wrote: post #39
mtnGoat wrote: post #38

Earlier quoted context omitted.

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…

Those levels.fyi compensation reports are distorted growth in the value of RSUs. At time of hire, RSUs are typically allocated at about 10-20% of total compensation. In the case of many reports on levels.fyi, particularly high-growth tech companies like Facebook and Google, stock prices have multiplied in value several times over. So for those companies RSU compensation can jump to 50% or more of total compensation. That is not typical at all.

Levels.fyi data is also distorted because data is self-reported. Higher-earning individuals are more likely to report because it is a form of bragging. Similarly, lower-earning individuals are less likely to report. Also, workers generally want to increase the perception of higher average compensation to gain an advantage in salary negotiations.

A better general point of comparison may be the salary reports put out by HR consulting firms like Robert Half [0]. Those reports can be of limited usefulness, however, because they report very broad categories and salary ranges. Still, they're useful to know about because those reports are what Company X will cite for why they can't pay you what levels.fyi says is the average pay.

[0] https://www.roberthalf.com/salary-guide

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

#60

Post by simonebrunozzi »

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…

No, you are not listening (reading) his point. He is 100% right, from my point of view at least.

Please read it again. And now, an example:

Startup A has two co-founders, Simon and John. 50% equity each. Startup A accepts an investment from VC B: $2M at a $10M post-money. VC should get 20%.

First weird thing: oh, wait: the employee pool needs to be carved out. It's 20%. So you have 20% employee pool, 30% Simon, 30% John, and 20% VC B.

Second weird thing (why you're wrong): wait, there's a 100k legal fee that the company will pay. Cash is now $1.9M. So the VC effectively paid $1.9M for a 20% stake, or a post-money valuation of $9.5M. Instead of $10M.

(the part about the employee pool might be irrelevant here; but I had to mention it because it's, in my view, akin to the weird thing about legal fees).

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