
Spark Capital will now pay their own legal bills - thingsilearned
http://nabeelhyatt.com/post/48791551517/picking-up-our-own-tab
======
pg
Impressive move by Spark, who have now put other VCs in the awkward position
of explaining why they don't do the same.

~~~
downandout
Not that a traditional VC will ever hand me a term sheet (I wouldn't approach
one), but if one did and it specified that I had to pay their legal expenses,
I would reject it on principle. It's rather underhanded, and I would
immediately begin scouring the paperwork to see what other sleazy tactics they
were employing.

~~~
jacquesm
If you were in a position to read / sign such a terms sheet then you may want
to ask why it specifies that before you reject it out of hand.

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.

~~~
downandout
Of course anyone would use a lawyer in such a situation. I'm just saying that
it is indicative of a hair-splitting, underhanded mentality that would raise
immediate red flags about doing business with them in the first place.

~~~
jacquesm
> indicative of a hair-splitting, underhanded mentality

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.

~~~
downandout
As previously stated, I have never and would never approach a traditional VC
in the first place for a host of reasons, this being one of them. There is no
VC game in town for me, and I am perfectly content with that.

------
jacquesm
One simple reason why most VCs don't do this is because they are sales tax
exempt and so end up losing up to 21% of the bills to a bookkeeping quirk. So
it's easier to pay a bit more out of the fund and end up with a deductible on
the side of the company invested in than with a freebie to the tax collectors.

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.

~~~
gws
US sales tax and VAT are not the same type of tax, main difference is that
sales tax is paid only at the retail level (by the consumer) while VAT is paid
at every stage: a company would pay VAT to acquire raw materials, retailers
VAT to acquire the packaged goods and consumers VAT on the final purchase. As
far as I know no US state applies sales tax on legal bills so for US VCs there
is no tax issue on this

~~~
vidarh
Regarding VAT, what you write is misleading in that VAT is also reclaimed at
every step (or more usually, offset against VAT due).

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.

~~~
gws
Indeed. The effect is the same in the end if the sales tax is paid and not
avoided (e.g., no receipt). With VAT at least the taxes on the intermediate
steps of production will have been paid even if the retailer and consumer are
cheating at the final step.

------
patio11
This is going to be one of those wonderful games of iterated group prisoner's
dilemma, in which one member of a formerly functioning cartel has just
publicly announced an intention to always play Defect.

~~~
larrys
Could also be that the tea leaves (or winds) were reading (blowing) in this
direction anyway and they decided to draw first blood in order to make the
biggest splash.

~~~
ericb
True, but that also fits within the prisoners dilemma. The way the rewards are
set up, you generally should defect if you think your opponent might defect.
If it is an iterated prisoners dilemma and you think they will start
defecting, you come out ahead if you beat them to it.

------
mrkurt
The number and types of bills we got after closing an A-round was ...
illuminating. Background checks on founders, in particular, was not something
I would have guessed we'd be billed for.

~~~
jacquesm
But did you expect them to do such background checks in the first place?

~~~
mrkurt
Yes, those weren't a surprise.

~~~
jacquesm
Good. Incidentally, the number of things popping up during such background
checks that scuttle a possible deal is quite substantial.

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.

------
downandout
While I've never raised money from traditional VCs, I have raised millions of
dollars from angels. Out of more than a dozen angels I've worked with, never
once has anyone even contemplated having the company pay the legal fees of the
investor. If this is the norm, I'm glad I dislike VCs enough never to have
approached them.

~~~
jaredstenquist
Yup, angels and VCs operate quite differently. Same experience here.

------
tlrobinson
Doesn't this just mean Spark will have a little less money to actually invest,
thus will need to invest at slightly lower valuations to get the same returns,
and companies will accept those lower valuations because they no longer have
to pay the legal bills?

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.

~~~
benmccann
I think it's also likely to reduce total legal expenditures. The investors
previously did not see the legal bill and so their lawyers had less incentive
to minimize fees.

~~~
jacquesm
You are essentially saying that a VC has no problem saddling up one of their
portfolio companies with unnecessary costs, in other words that they are
hurting their _own_ interests.

~~~
benmccann
Clearly the VCs have an interest in keeping legal expenditures down. But the
extra layer of indirection does not help that goal. E.g. employers,
individuals, and insurance companies all have an interest in lowering health
costs, but the structure of the market makes it a difficult goal.

------
bsims
Heard at an event last night that for one company, the legal cost to include
UPS as a strategic investor actually exceeded the amount they invested but the
company chose to do so in order to access UPS data.

------
immad
I wander if they are paying the $25k from management fees or from the fund.

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.

------
DanBC
Doesn't paying the legal bills for the other party create some conflicts of
interest or other weirdnesses for the lawyers?

And why do VCs expect people to pay the legal bills? Who buys the coffee when
they go for drinks?

\---

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?

~~~
larrys
"Doesn't paying the legal bills for the other party create some conflicts of
interest or other weirdnesses for the lawyers?"

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.)

------
dcaranda
Being entrepreneur friendly is so central to VC marketing that this effort
will likely pay itself as a PR expense.

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.

------
thinkcomp
More progressive still would be funding startups that disintermediate lawyers
and the billable hour system.

~~~
pg
[http://techcrunch.com/2013/03/11/yc-backed-clerky-helps-
star...](http://techcrunch.com/2013/03/11/yc-backed-clerky-helps-startups-
save-time-and-money-on-legal-incorporation-stock-issuance-forms-and-more/)

~~~
thinkcomp
In my humble opinion this barely scratches the surface. But it is better than
not investing, so I hope you and they do well with it.

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.

~~~
pg
All startups start by scratching the surface. Clerky doesn't plan to limit
itself to startup deal docs forever.

------
nwenzel
Love that this is #1 on HN and I'm going in for my YC interview on Sunday to
explain how we can help insurers, banks, and VCs (and apparently startups)
reduce their legal expenses.

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.

------
plusbryan
Spark have been excellent partners for us over the years at Sincerely. I'd
highly recommend them.

------
rajatsuri
Finally. Next step: removing the option pool from the pre-money? (as PG has
tweeted) Lots of other 'standard' terms that need to be reexamined as well

------
robk
This is nice for larger funds to do, with fatter management fees. Smaller
funds, not so much so.

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.

------
codebeaker
I always understood that the company receiving the money is supposed to pay
it's own fees and use a lawyer that it trusts, without taking money from the
VC on grounds that if you use the VC's money, to pay the VC's lawyer, on the
VC's terms, you aren't necessarily getting a fair deal. I think paying your
own legal fees to an impartial third party is a prudent investment. Perhaps
I'm just naïve.

~~~
wpietri
The problem they're describing is a little different.

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.

------
SurfScore
Startups are slowly but surely getting more power/respect when fundraising.
This is excellent, and hopefully the "heavy-handed VC oppressor" will go away
for good some day...

------
tomphoolery
Interesting read, I never knew the founder(s) had to pay VC legal bills just
to get the paperwork all situated.

Can you...pay the legal fees with the money the VC gave you? :)

~~~
nabeel
That is of course exactly what Startups do today. And it feels unfortunate.
"Wait, you have me cash just to spend it on your legal bill?"

------
srlake
Smart guys. Good move. Hell of a great advertising and deal flow move for $25k
* X deals per year they do.

------
michaelochurch
I feel like I just read "Women just got the vote" or "Pennsylvania Turnpike
will no longer admit horse-drawn carriages" in the newspaper.

