Q: I understand from your term sheet series that Venture Capitalists get their legal fees paid for by the company they are funding. I have a term sheet with a legal fee cap, but now my VCs are trying to increase the amount saying their legals fees are running higher than expected. What do you see as standard VC / investor side legal fees for Series A and Series B deals?
A: (Jason). I’m probably going to live to regret this post, as I’ll end up angering some lawyer friends of mine, but here goes…
I think a good number for a Series A financing is $25,000 or less for the VC lawyers. While hourly rates have increased significantly over the past decade, so has the sophistication and standardization of financing documents. Therefore, the prices for financings have not increased that much over time. If the company’s and VC’s lawyers are experienced and aren’t over aggressive, negotiating the documents shouldn’t be too hard.
The most time goes into the due diligence process, so it’s important that the company has its house in order and pertinent documents well organized. If they company is sloppy, legal fees will definitely be higher.
All of this being said, we’ve only seen one or two deals in the past 4-5 years that have gone over the cap.
I’m sure this post will raise other questions regarding legal fees, so let me anticipate a couple of them and answer them below.
Q: How much should it cost of later rounds?
A: Given that you are most likely going to use the prior round documents as starting points for drafting, all you are paying for is updated due diligence fees, so it shouldn’t be anymore (and maybe less) than the earlier rounds. If you have a new investor coming into the round as the lead, they may want to do all the diligence from scratch, so it could still be a $25,000 or so proposition.
Q: How much should it cost for recaps / down rounds, etc?
A: More. Think $35,000+. These are complicated deals, with shareholder mailings, consents and a lot more “hoops” to jump through.
Q: How much for debt / bridge financings?
A: Less. Think $15,000. These are even easier deals to do and the diligence is much less.
Q: What do I do if my VC is trying to increase the fee cap along the way?
A: Find out why they are asking for this. When we’ve increased the cap mid-financing it has been because either the company wasn’t well prepared for the financing, there was something “abnormal” found in the diligence, the deal turned out to be a lot more complicated than expected, or the company counsel were pains in the butt. Find out what is going on besides inefficient cost overruns of investor counsel.
Q: How much should the company pay its lawyers for financings?
A: This is much harder to estimate. Depending on how much “heavy lifting” the company lawyers have to do to prepare the company for the financing and how involved they are in responding to diligence requests, there can be a range. Additionally, the company lawyers draft the documents. The documents should all be mostly “off the shelf” but expect to pay at least double what your VCs are paying for your own counsel to run the process and respond to all of the comments and inquiries.