

The madness stops here - don’t pay a VC any fees - edw519
http://uk.techcrunch.com/2009/09/29/guest-post-the-madness-stops-here-%E2%80%93-don%E2%80%99t-pay-a-vc-any-fees/

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mechanical_fish
I'm not surprised that the day has come where someone actually has to write
this. Because, off and on, I've browsed through message boards frequented by
writers, where there's a scam - the literary agent scam - that has become so
standard that there's practically a manual for it. Google _Dorothy Deering_ to
learn more about it; anyone who ever thinks of writing a book or screenplay
should read something like this.

The prevalence of people who claim to be "insiders" and who charge you money
up front to be represented by them led to the coinage of Yog's Law: _in
publishing, money flows toward the author_. Looks like we need the same rule
for startups.

If you start a company or write a book, you'll have to pay expenses (Ramen and
pencils) but you don't have to pay to be rejected by the marketplace. The
market is happy to reject you for free, as many times as necessary for you to
get it right. Be sure to take advantage of that offer. :)

~~~
coglethorpe
Please tell me this (the first result in Bing) is a different Dorothy Deering
:-)

[http://www.cla.purdue.edu/english/directory/Faculty/Deering%...](http://www.cla.purdue.edu/english/directory/Faculty/Deering%2C_Dorothy.html)

~~~
mechanical_fish
I believe it is probably a different one, yes. Try "Dorothy Deering SFWA".

What an unfortunate naming collision for poor Professor Deering.

------
pg
It's almost universal for VCs' legal fees to come out of the money they
invest, though you don't have to pay unless the deal closes. Basically you
just subtract these from the deal in your mind in advance.

Trevor and I were talking about this custom a few days ago. We think the
purpose here is not to mislead startups so much as to mislead LPs. By taking
the legal fees out of each deal, the VCs are able to make their annual
management fees look artificially low-- or more precisely, to spend a larger
percentage of a given management fee on partners' salaries.

~~~
anamax
> It's almost universal for VCs' legal fees to come out of the money they
> invest

It's surprising is how large the fees are. It's almost like VCs have never
done a comparable deal before.

Misleading LPs about management fees is small potatoes. If you believe the
"disproportionate return" argument that VCs make, excessive legal fees have a
disproportionate effect on returns.

~~~
pg
It's not that surprising when you understand where the money goes. It's not
spent on preparing documents, but on arguing about terms. It's really the cost
of the negotiations between termsheet and closing, to the extent they're done
through lawyers.

The solution is to make deals more standardized, so that when you see the
termsheet you know what the deal's going to be.

That would be good for other reasons besides saving money. The time it takes
deals to close is very damaging to startups. I'm convinced most investors have
no idea how damaging. A startup raising money will get next to nothing done
till the deal closes, and getting nothing done is the worst possible thing
that can happen to a startup.

~~~
rlucas
I quite disagree WRT legal fees and what causes them (I am a VC, not a lawyer,
believe it or not).

The substantive terms usually get argued about, up-front, by the business
people (VC and entrepreneur).

It's true that there are ambiguities left even by a detailed term sheet.
However, decent attorneys go with what's "market" for a given type of deal and
don't spend a bunch of time on it.

What really kills you is that there are almost always a ton of i's to dot and
t's to cross, things that entrepreneurs (and for that matter, VCs) don't and
shouldn't care about (so long as they get done, by hook or by crook). For
example: do you have your articles filed correctly? Up to date? Foreign
corporation authorization in your physical location? Minutes from regular
board meetings? Properly issued stock certs and register? Voting agreements /
etc. from all cats-and-dogs shareholders (angels, uncle Larry, etc.)? Options
properly approved, issued, expensed? Right number of shares authorized for
each class and type, and for all options and warrants? blah blah blah blah
blah.

And that's even before you get to stuff like reps and warranties. Screwups on
any one of these things, conceivably, could allow someone or some government
to screw up the deal later on, even if the business takes off.

Don't think of the definitive documentation of a round solely as a hangup en
route to getting the wire. Think of it as a cleansing ritual where you pay the
high priests to go back, expurgate your sins and omissions by papering over
them, and make sure you don't end up going to jail or getting sued by the SEC
later. Having your round definitively documented by non-dipshit attorneys
basically gives all sides a reasonable comfort that the legal risk in the deal
is low.

It's a PITA, yes, but it does good for all parties involved.

The "make deals more standardized" trope is oversimplified. It could work,
yes, but only if the deal used a precise template for the ENTIRE history of
the company, from ideation to handshakes to incorporation to seed money to A
round. Since that can't be so, removing the legal risk is just going to
require tens of hours of smart people slogging through paper and data.

Now -- should the VCs pay for this out of our piece or not? Look, frankly, we
want to get our 20% for $2 M (or whatever). If you insist, I suppose we could
reduce the premoney a tiny bit, get our 20% for $1.95 M, and pay the $50k out
of pocket. You get the same net cash for a lower putative valuation, I'm still
out $2 M.

Frankly: it's not worth the brain damage, just do it the way every other deal
has been done. (I'm only replying because I'm in an ornery mood and too
caffeinated to resist the bait right now...)

~~~
pg
Good point. The money doesn't all go to negotiation, so standardized terms
wouldn't eliminate all the cost.

