Despite the existence of standardized term sheets from the NVCA legal fees continue to be a major cost of raising early stage capital. I always recommend getting one of the biggest and best law firms as your counsel during your fund raise, because legal mistakes can really hurt you and your startup. But good attorneys are very expensive. Remember that the venture capitalist will also have an expensive lawyer helping his/her fund with the investment, and they will ask you to pay for their lawyer too. So, when you get the term sheet from your investor you need to:
Make sure you cap your investor’s legal fees
It is typical that an investor ask for you reimburse their legal fees. However, many investors kindly forget to put the typical second sentence behind this provision in the initial term sheet that they give you. That sentence is something like “reasonable fees in the amount of up to $25,000 to Investor’s counsel.” You have ever right to cap the fees, and the typical cap is $20k to $25k.
I really wish there was an easier way to raise small amounts of capital, say less than $1 million, without expensive lawyers. But I have yet to find a really fair way to do this, and because the stakes are very high it makes sense for both sides of the negotiation to have good representation. I guess legal fees will always be part of a fund raise. I know I’ve complained about legal fees before, and will likely continue to do so…
December 12th, 2009 at 12:15 pm
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