Yokum is right – if you`ve closed enough Series A deals, lawyers are more than capable of committing to an estimate as an upper limit of fees. Where he and I differ is the quantum. The investor lawyer should not charge more than $10,000 to $15,000 in legal fees for a Series A transaction. There is no shortage of NVCA working groups dedicating pro bono time to creating Type A documents. Virtually nothing is written from scratch by venture capitalists for a Series A round, and the legal due diligence requirements are modest. Venture capital advisors typically generate the majority of their venture capital clients` fees through fund creation and LP management. Fund work gives venture capital firms more than enough leverage to impose a fee cap at the Series A stage. During our first launch call, the topic «What legal forms should we use?» was discussed. Since this was a light to normal series agreement, I suggested series documents originally designed by Ted Wang/Jason Boehmig to Fenwick. Senior counsel (let`s call him Frank) disagreed.
In this guide, we`ll look at typical VC fund fees and how investors can calculate the fees associated with investing in a fund. Founders *should* ask their investors what their policy is regarding investors` legal fees, and should reject all venture capital firms that charge companies for their legal fees. This is a ridiculous practice and it is time to change it. When an investor (also known as a limited partner or «LP») invests in a venture capital fund, they are buying a service. And like any service, it costs money. The business advisor typically does more work than the early-stage investor advisor: preparing transaction documents, disclosure plans, due diligence records, pro formas, filing the charter, issuing shares (hopefully now on Carta!), and more. And, of course, the corporate lawyer will see the agreed amount in the term sheet for investor advice and feel, «Hey, I do most of the work here, so shouldn`t I get paid more than the investor advisor?» And this is where the legal costs of a simple financing transaction get out of control. All venture capitalists have an annual budget.
Many people think that venture capital firms can spend a lot of money on legal fees and miscellaneous expenses. While this may be true for a tiered blue-chip venture capital fund with in-house advisory and management fees accumulated over the years, this is not the case for most venture capital firms. And that`s certainly not true for aspiring fund managers who haven`t raised beyond their second or third fund, and for those who have raised only $50 million or less. In most financings, the bulk of legal fees come from legal diligence and cleaning up company documents, not back and forth between lawyers arguing over the terms of a term sheet or share purchase agreement in detailed documents. Note that training and fund management fees are generally costs of funds paid by the fund and prorated to fund APs. «Danger» Even if you have negotiated a cap on the portion of your investors` legal fees that you are responsible for covering, your lawyers` fees can get out of control if you`re not careful. If your lawyers are discussing something important, you should tell them to bring it to you before it passes more than once between different legal teams. The company usually pays for corporate and investor advice (or rather, it comes from investor funding). The amount for which the Company is liable is generally limited (traded on a term sheet) or subject to reasonable fees. The cost of seed financing can be as high as $5,000, while the fee for late-stage complicated financing can exceed $100,000.
Business consultants tend to be more expensive than investor advisors because business consultants write documents and facilitate due diligence. Price fluctuations are usually the result of the degree of due diligence and negotiations between the parties. As expected, negotiations are much more thorough and fees much higher when corporate and investor advisors are involved. Costs also increase when due diligence reveals governance or intellectual property issues that need to be addressed. As discussed in a separate presentation, legal due diligence looks at financial (capitalization), operational (intellectual property) and regulatory issues. Legal counsel cannot charge or reduce fees if the transaction is not classified. If the lawyer shows considerable care, the prosecution is safe. This may require contracting with a specialist lawyer to conduct intellectual property or regulatory due diligence. LPs generally pay three categories of fees when investing in a venture capital fund: (i) the fund`s costs to the organization of the fund and the fund`s ongoing administrative and legal fees, (ii) the fund`s management fee, and (iii) deferred interest. Let`s break each one down.
For most VCs, once a term sheet is signed, it is an expensive duty to come through diligence and justice, not the funniest part of the job. They are therefore easily convinced to hand things over to their law firms to take care of them. However, your lawyers have absolutely no interest in controlling costs. I have never seen an agreement where the cost of advising investors was significantly below the ceiling agreed in the termssheet. One way or another, in a magical way, the cost of advising investors always seems to be only a few dollars below the upper limit or sometimes even above the upper limit and is then «discounted» to the amount of the cap. And this happens even with the simplest transaction. At the very least, founders can manage legal fees by capping them. For start-up trades, a cap of $10,000 to $25,000 should be acceptable. Caps on legal fees can be powerful when founders negotiate with a syndicate, as they motivate investors to coordinate their legal activities rather than launching a group of lawyers into bargaining. Legal advice plays an important role in financing the transaction.
The process can be quite complicated and the lawyer will help negotiate the agreement as well as prepare the relevant documents. The start-up will always have advice. In a seed cycle, it is not common for investors to have advice. In a Series A round, it is very common for the investor to also have advice. In courtrooms across the United States, litigants follow the «U.S. rule,» which is the general U.S. rule that each party is responsible for paying their own attorney unless (a) there is a specific law that authorizes costs, or (b) the contract contains an attorneys` fee clause. This camp understands that there is a divergence of interests between founders and venture capitalists, and that venture capitalists generally have power in this imbalance. But when it comes to legal fees, these are necessary costs to close deals. Standard forms can help reduce costs, just like legaltech. But in the general context of venture capital, legal fees are just the cost of doing business.
We shouldn`t sweat the little things because they get in the way of important things like starting businesses and scaling businesses. Negotiate an upper limit and stick to it. Once the fund is up and running, a primary care physician will likely pay ongoing legal fees related to parallel negotiations, changes to fund operational documents, and other expenses requiring legal expertise. The cost of administering additional funds generally includes the preparation of financial statements as well as annual tax preparation services. Most industries have unwritten rules that are shocking when you first hear about them. Often these rules are so widespread that they become calcified and non-negotiable. Today, we are focusing on an unwritten venture capital rule regarding legal fees. The amount of management fees often depends on the size of the fund.
Seed funds sometimes charge higher management fees than late-stage funds because they have fewer capital obligations and may therefore seek proportionately higher fees to cover operating costs. A $15 million fund with a 2% management fee would raise $300,000 per year to cover day-to-day operations. If this fund had a 10-year term, LPs would contribute $3 million over the life of the fund. For this reason, it is important for general partners to understand the fees associated with a fund before investing – just as it is important for general partners to create a reasonable fee structure that does not discourage them from investing in their fund. Limited partnership registration fees can cost anywhere from $500 to $2.5,000 per year. Then there are the attorneys` fees for setting up the fund, which can typically cost several thousand to tens of thousands of dollars, depending on the complexity of the fund. Do you think Facebook has paid its legal fees? I doubt it. What for? Because Facebook had so much influence. It is not uncommon for business advisors to say that their cost will be 1.5 to 2 times that of the investor advisor.
