Impressive move by Spark, who have now put other VCs in the awkward position of explaining why they don't do the same.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.