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Spark Capital will now pay their own legal bills

nabeelhyatt.com

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Re: Spark Capital will now pay their own legal bills

#91

Post by gws »

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…

US sales tax and VAT are not the same type of tax, main difference is that sales tax is paid only at the retail level (by the consumer) while VAT is paid at every stage: a company would pay VAT to acquire raw materials, retailers VAT to acquire the packaged goods and consumers VAT on the final purchase. As far as I know no US state applies sales tax on legal bills so for US VCs there is no tax issue on this

Re: Spark Capital will now pay their own legal bills

#92

Post by jacquesm »

gws wrote: post #91
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…

US sales tax and VAT are not the same type of tax, main difference is that sales tax is paid only at the retail level (by the consumer) while VAT is paid at every stage: a company would pay VAT to acquire raw materials, retailers VAT to acquire the packaged goods and consumers VAT on the final purchase. As far as I know no US state applies sales tax on legal bills so for US VCs there is no tax issue on this

> so for US VCs there is no tax issue on this

Indeed. But since in this thread all VCs are considered equal it would be worthwhile to point out that particular difference lest this leads to EU venture capital companies being branded as cartel operating vultures.

As an aside, the whole thing strikes me as a PR move rather than one with real effect, it's a zero sum game, lawyers will get paid one way or the other and there is only so much money to be divided.

Re: Spark Capital will now pay their own legal bills

#93

Post by robk »

This is nice for larger funds to do, with fatter management fees. Smaller funds, not so much so.

There's not really a structure to take it out of the fund commitment, so this comes out of management fee. Smaller funds don't have this luxury though - if you're running a microcap fund, you simply don't have $250k free in your management fee budget for something like this. That's the salary for another partner really.

Re: Spark Capital will now pay their own legal bills

#94

Post by fredwilson »

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.

Hi Paul

i would prefer to eliminate legal fees entirely by using standard docs and not negotiating them on either side. we have done that many many times and it works great. all you need to do is use a standard template. most law firms have them.

this is what i propose on every seed and series A we do. most entrepreneurs take us up on it. and then we don't even use a lawyer on our side.

however, there are cases, like one you and i have exchanged emails on recently, where a legal issue comes up that is created by the entrepreneur's counsel, that requires a lot of work and sometimes we end up getting stuck with the bill on it.

in situations like that, i like to have the discussion of who should pay the bill up front and on a case by case basis

Re: Spark Capital will now pay their own legal bills

#95

Post by tptacek »

jacquesm wrote: post #88
tptacek wrote: post #64

Earlier quoted context omitted.

Sales tax?

In the EU sales tax (VAT, whatever) is added to every business-to-business transaction and later refunded. If your fund is classed as financial services sector then you may be sales tax exempt. This has certain tax advantages but really doesn't help when you start to receive substantial bills (such as legal fees on a transaction of this magnitude) with sales tax added to them because you can't deduct the sales tax on…

Yeah, not here.

Re: Spark Capital will now pay their own legal bills

#96

Post by vidarh »

SkyMarshal wrote: post #52
icebraining wrote: post #49

Earlier quoted context omitted.

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

"This" (noun): superfluous unoriginal internet meme language. Better way: just use your own words, be authentic. Pretend like you're Steve Jobs, and each word you write is your next product.

I love how you suggest that people should stop behaving the way they are in order to "use your own words, be authentic". How is altering their behaviour in order to satisfy someone on a forum being authentic and using their own words?

Re: Spark Capital will now pay their own legal bills

#97

Post by wpietri »

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.

It's not underhanded if everybody knows its coming.

I was shocked the first time I saw this, but I called around and discovered that it's one of the things VCs do because they can. Since our VC was no worse than anybody else, I put it in the "fine, whatever, fuck you, but fine" category of things. It didn't end up even being in my top 10 things I'd change about traditional venture capital operations.

If you object to every fucked up thing about the system you're in, it's very hard to get the power to reform the system. I'm perfectly happy to beat my head against a wall, but I try to pick the walls that are ready to break. As Confucius said: "The Historiographer Yu was truly of straight character. When the government was just, he was like an arrow. When the government was unjust, he was like an arrow. Chu Po Yu is definitely a Superior Man. When the government is just, he will have a position in it. When the government is unjust he can roll up his principles and keep them in his breast."

So bravo for Spark for being the leader on this. It's really nice to what entrepreneurs turned investors are doing. I'm glad Nabeel didn't turn down that VC money on principle back in the day, or he might not now be in the position to try to fix this.

Re: Spark Capital will now pay their own legal bills

#98

Post by wpietri »

codebeaker wrote: post #90

I always understood that the company receiving the money is supposed to pay it's own fees and use a lawyer that it trusts, without taking money from the VC on grounds that if you use the VC's money, to pay the VC's lawyer, on the VC's terms, you aren't necessarily getting a fair deal. I think paying your own legal fees to an impartial third party is a prudent investment. Perhaps I'm just naïve.

The problem they're describing is a little different.

Your lawyer always works for you. You pay them with the company's money. Which is also generally investor money. But that's ok; your lawyer will be very clear that they work for the company. (Which, it important to note, is different than working for the founders.)

Here, VCs require you to pay their legal expenses for doing the deal. So when the deal closes, they send you a bill for their lawyer. The VC's lawyer definitely knows who they are working for: the VC.

One of the problems with this, besides the you-must-be-fucking-kidding-me factor, is that the VC's lawyer has no incentive to keep things quick. The VC has a very slight incentive to speed things along. But if it's coming directly out of the VC's books, then hopefully they'll keep a tighter reign on all the last-minute stuff that somehow hasn't been made standard and turns what you'd think would be an easy thing into a $25k bill.

Re: Spark Capital will now pay their own legal bills

#99

Post by vidarh »

gws wrote: post #91
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…

US sales tax and VAT are not the same type of tax, main difference is that sales tax is paid only at the retail level (by the consumer) while VAT is paid at every stage: a company would pay VAT to acquire raw materials, retailers VAT to acquire the packaged goods and consumers VAT on the final purchase. As far as I know no US state applies sales tax on legal bills so for US VCs there is no tax issue on this

Regarding VAT, what you write is misleading in that VAT is also reclaimed at every step (or more usually, offset against VAT due).

The net effect is pretty much the same as a sales tax, except the tax revenue becomes due proportionally at the step in the chain where the value is added rather than all at once at the retail level.

Re: Spark Capital will now pay their own legal bills

#100

Post by yebyen »

harryh wrote: post #37
chipmunc56 wrote: post #11

Earlier quoted context omitted.

this. If I give you $8 and ask you to pay me $2 for expenses, or I give you $6 you don't much care. This would only apply to entrepreneurs who don't know that term sheets are less attorney fees.

This is exactly right, but I prefer the $6 case because it makes it much more obvious what is going on. We should make the truth obvious whenever possible. Hopefully (as pg points out) the next thing to go is the weird way that employee option pools are handled.

The truth is that lawyers are being paid, whether it comes out of your pocket or mine. It's very generous but as a person who has never received a term sheet at all, one way or another I see it as turning another part of the process more opaque.

What if I never have to pay another lawyer?

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