Raising a round of funding requires solid legal counsel on both sides of the table. But who pays for the lawyers? This article will explain legal expenses and help founders negotiate the best terms for their startup.Â
Legal Expenses
What are the legal fees in startup funding? Well, it depends. The average legal expenses for startup funding can vary widely depending on a variety of factors, such as the location of the startup, the complexity of the deal terms and the legal fees charged by the startup’s chosen law firm.
- Seed Legal Expenses. As a rough estimate, one party’s legal fees for a basic seed round are around $15K.
- Series A Legal Expenses. As a rough estimate, one party’s legal fees for a basic Series A round are around $75K.
Note that these are fees for a very plain vanilla deal. When we first speak to founders about a funding round, they always tell us that it’s going to be a straightforward and simple deal. But the truth is that it’s rarely the case, so assume that your fees may be higher. We’ve certainly heard stories of friends and clients paying legal fees double or even triple the fees stated above.
Paying Investors’ Legal Fees Is Unjust
Unfortunately, it has become common practice for startups to be required to pay the legal fees of their investors.
Remember that the numbers above are the legal expenses for one party. If you agree to take on the legal expenses of your investors, then you’re doubling your cost. So, it’s likely that total legal expenses for a seed round would be $50K. For a Series A, it would be $200K.
To be clear, the term requiring startups to pay for investor counsel fees is unjust. This is because startups are forced to pay the legal fees of the counsel negotiating against them. This could lead to unexpectedly high legal costs. For example, opposing counsel can drag out the diligence process and negotiations, which increases their legal bill. Ultimately, the startup is left with a legal bill they had no control over.
Investors should have the financial resources to cover their own legal fees. If they do not, they should not be investing.
The well-financed investors are asking startups on shoestring budgets to pay not only their own legal bills but also those of the investors. We find this term to be an abuse of power between investors and entrepreneurs. It is short-sighted, unnecessary and a power-grabbing tactic. In our opinion, it should be removed from the standard term sheet.
How Startup Founders Should Negotiate Legal Fees
However, until the term is removed from the term sheet, founders need to deal with it. Here’s the process:
- Strike It. In every term sheet you ever receive throughout the entire lifecycle of your company, you should always strike it on the first round. Instead suggest that both parties pay for their own legal fees. This is a very reasonable ask, and it’s accepted way more often than you’d expect.
- Cap It. In the event that they won’t strike it, cap the fees as low as possible. Start with $5K for a seed and $10K for a Series A. For pre-seed deals, it’s uncommon for the startup to pay investor legal expenses.
Choosing a Lawyer for Your Funding Round
It’s important for founders to understand that the most important factor is not the firm, but the attorney you’ll be working closely with. Even within the same firm, you may find attorneys who are perfect for your needs and others who are a poor fit. When searching for an attorney to represent your startup, there are several factors to consider. These factors are ranked below in order of importance:
- Experience: Look for an attorney with experience working with startups at your funding stage who understands the unique challenges and legal considerations of closing the deal. In many ways, your lawyer is your guide through unfamiliar territory, so you want a guide who has seen enough to point you in the right direction.
- Availability: Choose an attorney who is responsive and able to work at the pace of an early-stage startup.
- Fee Structure: Consider the attorney’s fee structure, and find someone whose fees align with your budget and needs. Some attorneys charge hourly rates, while others may offer flat fees or alternative billing arrangements. For most startup legal work, an experienced startup firm should be able to offer flat fees. Avoid the billable hour where possible, as it generally misaligns the attorney and founder’s incentives. The net result is often a slow pace and surprise bills that are way too high. At Westaway, everything we do is on transparent flat fees.
- Compatibility: It’s crucial to find an attorney who you feel comfortable working with, and who shares your values and vision for your startup. You’ll be working together closely in the months and years ahead, so a strong working relationship is important. Is this attorney the right fit for your startup?
If you’re an early-stage startup founder raising a round, we’d love to chat with you to see if you’re a good fit for our firm. Click here to set up a free consult. Additionally, you may want to also check out our:
