Spark Capital will now pay their own legal bills
nabeelhyatt.com
nabeelhyatt.com
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
In practice, the startups' own legal expenses will probably also be lower. In the bad old days, lawyers on both sides would engage in a leisurely and expensive back and forth, knowing they'd both get paid out of the amount invested. But if the VCs have to pay their lawyers out of their own management fees, they'll instruct them to make the negotiations fast and simple, which will in turn decrease the billable hours on the startup's side as well.
And PG, thanks for changing the world. You made the currents swirl in a way that in some small way influence all the ripples like this downstream.
Eight years in the insurance world has shown me that the two biggest law firm "bad behaviors" are excessive billing and multi-party meetings. Both of which, as noted, VCs will be in a stronger position to refuse to pay.
I call this version of the principal-agent problem the "new boat problem." When a partner wants a new boat, she/he bills more hours.
Even more pumped for YC interview on Sunday after reading the comments.
Better way: just use your own words, be authentic. Pretend like you're Steve Jobs, and each word you write is your next product.
2. I didn't tell them what to say, only what not to say. Putting words into their mouth might have been inauthentic, but that's not happening here.
3. Just because people are "behaving the way they are", doesn't make it authentic. In case you haven't realized, we live in a world filled with constant sophisticated attempts at mass behavior modification. We are all victims from time to time, and behooves us to at least be introspective and aware of when we are. (not that meme language is a part of that, it's more an accidental artifact of networked humanity, but point generally applies).
4. Using memes is a rhetorical crutch for lazy writing.
You responded with 32 words to a 37 word post so that you could quibble about a single word, or 3% of that post. While preaching on the righteous subject of "intelligent discussion," no less. So if we're going to complain about empty calories, I'm pretty sure you're winning that game.
Hopefully (as pg points out) the next thing to go is the weird way that employee option pools are handled.
What if I never have to pay another lawyer?
The advantage of having the VC pay the legal bills is that they are a bigger fish and can more easily put in place and enforce the legal billing guidelines. Also, as a much more likely repeat customer, the VC will likely get better bills to begin with.
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.
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.
I believe you may be wrong about that. But it appears you've now found a good match in Spark! On the down side, it may then be the only game in town for you, there are good reasons for the 'company pays fees' rule, see elsewhere in this thread for one possible reason.
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.
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.
When I lead a syndicate deal, I am the person that works with the investors' lawyer to get the deal done. But I'm never the majority of the round (or even the largest single investor.) But being the person who retained the lawyer for the investor group, I am on the hook for the bill.
I'm happy doing the work of getting the deal papered, but I wouldn't be happy if I had to pay the whole legal bill when I'm only putting in 10-20% of the round's money.
There are two ways to share the expense:
1) I pay the lawyer then go around to the other investors asking them to pay me their piece. Anyone who has ever been saddled with being the payor of the bill for a large group of people at a bar or restaurant knows how this turns out. Some people forget, some people argue that they should pay less, and it's a huge logistical hassle creating nothing but bad feelings. I suppose I could get each investor to sign something saying they would pay me their share, but that's just more legal expense.
2) We up-front tell the company that they are paying the investors' legal bill (last time I did this, the bill was $6k, the cap was $10k: I don't do fancy deals.) The company factors this into their calculation of whether the investment structure is one they want to accept or not.
Number 2 is nothing more than a structural convenience. But without it I wouldn't take on the burden of leading deals: it would be more trouble than it's worth (note that, as lead, I get the exact same economic terms as the rest of the group, so I'm essentially doing free work when I'm leading and the other investors get the benefit.)
So I'm sticking with having the company pay the legal bill. If we're negotiating a deal and this (or any other term) seems unfair, we need to sit down and talk about it. Once my money is in your bank account and a couple of your stock certificates are under my mattress we're on the same team. We both have a huge incentive to make sure neither of us feels like we've been taken advantage of.
Not only that but different sellers, vendors, sides of business transactions, typically offer different terms, features, benefits.
The standard procedure when someone brings up something someone else is willing to do, is to bring up your strong points and why that particular feature shouldn't matter that much as a differentiator. And the truth is how much does this really matter vs. the benefits of the particular VC firm?
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.
I don't feel (given what I know about this) that it's an "abuse" or though I can absolutely see what it is viewed this way. And of course the people who are charging it are going to justify it by saying "it's standard practice" because that is the easiest way to get beyond the objection and smooth things out.
People have certain ideas of what they find right and just and don't think rationally about what it really means relative to the entire transaction.
For example you could go to a restaurant where the steak dinner costs $30 but feel it is an abuse because they want $1.50 for a glass of tap water. Or they want to charge you to use the restroom. But if you go to an equivalent restaurant which charges $35 and gives you free tap water and bathroom you wouldn't think twice (merely focusing on whether you think you got value for the $35 meal).
The reason people have to rely on arguments of "standard practice" is because they are quick and easy and get by objections much easier then a lengthy discussion. It's a time saver.
In numbers: if a complete process costs $100K and the investment is 2M the fund is out 2.1M. If they pay the bills from the fund directly they're out 2.1M without a sales tax return, if they pay 2.1 to the company and the company pays the bills the company gets back the sales tax so effectively this saves 20K or in this example about 1%. Not much but also not nothing, and if a fund does a lot of smaller deals this sort of thing adds up.
Not all funds suffer from this (likely Spark isn't one of them) so the ability of other funds to match this is dependent on whether or not they have classed themselves in such a way that they are sales tax exempt.
I'd imagine Spark to be able to offer exactly the legal fees less for the same amount of stock in company 'x' compared to some competitor that does it the usual way so effectively this shouldn't matter but it is excellent publicity for Spark.
> 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.
I've been on HN long enough to recognize your nick and I was well aware that you live in Europe. You jumped into a discussion about a US-based VC firm and claimed it was motivated by sales tax. Please don't get irate just because "HN" tried to be helpful by explaining why sales tax wouldn't apply here.
And for the record, I live 5,000+ kilometers from the VCs on Sand Hill Road.
HN seems to be a bit myopic in this sense, that if something hasn't happened to an individual therefore it doesn't happen.
But not everybody here looks at the data through the lens of a VC and that is what we're discussing here.
In this thread VCs are equated with a cartel, the truth is they're all continuously in competition with each other rather than colluding with respect to making terms sheets that are worse for the companies they invest in.
Terms sheets are negotiable on a per-case basis, if you can get better terms with a different VC then you should go for it, there is nothing that is 'always done this way' and any unspecified cost can be made into a certainty by either putting a cap on it or negotiating a lower investment with the other party accepting the fees to be paid to be directed to them if that gives you more peace of mind.
That link shows the American Bar saying 'Don't start charging sales tax on legal fees' which implies that they don't currently charge them.
"Currently, only three states have a tax on legal services – Hawaii, New Mexico and South Dakota"
So where do you work?
I think the myopia here is you assuming that VCs don't normally pay legal fees because it's a sales tax problem and they don't want to waste money.
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.
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.
-Pay own legal fees, saves portfolio company money
-Better terms/relationships with investments attracts more, higher-quality startups
-Higher quality startups will likely be the big hits VCs need to be successful
-Attracting high quality startups forces other VCs to work with us on future and larger investment rounds
It's not so much that there is stuff that was eye-brow raising, it is mostly a breach of trust in terms of disclosure. Sometimes founders are not honest with each other from the get-go, it wouldn't hurt for founders that feel they are in a position to hit one out of the park to have a 'full disclosure' session with each other so they know at least what if any skeletons there are in the various cupboards rather than to have a surprise late stage rejection. Those are generally bad for business.
Of course that's a huge simplification, and I'm in favor of reducing sneaky terms that can take entrepreneurs by surprise, so I'm not complaining.
The very first thing that popped into my mind, though, was what happened with ArsDigita. I don't think they've agreed to not use the company's money when suing the company's CEO.
The justification for why VCs don't pay their lawyer bill has always been that they don't want to take the money from their management fees, if Spark has figured out how to take it from their fund and their LPs are okay with that that is good.
If not then they are footing $25k from their pocket. But I guess if they only do 10 deals a year their max liability is $250k which isn't bad for a $450m fund.
Also, transaction fees are typically presented as being deducted from the capital being moved, as opposed to just charging the company. Of course, net it's the same. But language matters.
And why do VCs expect people to pay the legal bills? Who buys the coffee when they go for drinks?
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Also, I'm using Chrome on Win Vista. Here's a screen shot. (http://imgur.com/5DP7C0e)
If that's how they wanted it to look, well, fair enough. But I don't think it is. I wonder how much time and effort is spent building style sheets that end up rendering as nasty as the results I got?
This happens quite frequently in insurance defense situations. Say a Physician is hit with malpractice and the insurance company is paying all legal costs. (Or even auto insurance as maybe a better example).
The important thing to remember, is that you are the client ("the insured") and even though the person paying the bills will attempt to get you to use an attorney that they have already worked out rates with it is within your right (going along the lines of the point you raised) to get another attorney, within reason, price etc. (The price doesn't have to necessarily be the same either.)
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.
Insurers are reporting significant savings. Law firms that get the work are happy. The rest... not so much.
It's a sign!
For a more substantive comment, moving the legal bills into the hands of a "bigger fish" is bad news for law firms. VCs are less likely to be willing to pay for over-billing, unnecessary tasks, and other bad behavior. (shameless plug) VCs, especially those that use my team's software, can save a bundle on legal fees with very little effort.
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.
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.
Can you...pay the legal fees with the money the VC gave you? :)