Under expenses in the Series Seed term sheet, the startup agrees to reimburse the investors (purchasers) a flat fee of $10K for counsel expenses. The founders are essentially agreeing to reimburse all the investors of the seed round for a one-off legal fee. The fee is set as a fixed charge of $10K. Using the Series Seed document for a financing round is considered highly standardized work from a legal perspective. The legal fee is usually deducted from the wire transfer that the startup receives upon the closing of the financing.
An Abuse of Power
To put it bluntly, this term is bullsh*t. The wealthy investors/firm are asking the startup that’s struggling to stay alive to pay not only their own legal bills but the legal bills of the investor. We find this term to be a highly offensive abuse of the investor-entrepreneur power dynamic. This is hands down the most short-term, unnecessary, power-grabbing term in the Series Seed term sheet. In our opinion, it should be struck from the standard term sheet.
This clause forces the startup to pay the legal fees of the counsel that is negotiating against their best interest. Additionally, opposing counsel has the power to drag out the diligence process and negotiations of the deal, which increases their legal bill. Unlike company counsel, the startup has no ability to rein in costs. The startup is left covering a legal bill they had no control over.
If investors don’t have the money to pay legal fees, they shouldn’t be investing.
In the Series Seed term sheet, the expenses right is as follows:
Expenses: Company to reimburse counsel to purchasers for a flat fee of $10K.
This term should be removed from the standard term sheet, but for now it’s in there. Founders should do whatever they can to remove this term altogether. If deletion is not a possibility, then at least negotiate for a low cap on legal fees and do not consent to any legal fees in future rounds.