But then all your programmers have private offices, which has been thoroughly established as dramatically important to productivity, as well as a bargaining chip in recruiting the best people.

http://www.joelonsoftware.com/articles/FieldGuidetoDeveloper... (Kind of old, but still applicable.)

Supplying an allowance to rent somewhere with a good workspace or set up an office is still mostly cheaper than renting an inner-city space with private offices... and then you don't have issues with VCs thinking you're burning their money unnecessarily.