We closed an investment recently. It was a seed round. Our firm priced the round and we were joined by a number of small VCs and a few well known angels. We agreed to close on a standard set of "light preferred" documents without negotiation. There was no investor counsel on the transaction. We just signed the standard documents which were tweaked to reflect the round size, share price, and board provision in the term sheet.
The legal fees for this transaction were $17,000. I talked this over with the entrepreneur and we agreed to pay the legal bill. We are both big fans of the law firm involved and felt they earned their fees on this transaction.
But I've been thinking about this situation over the past week and I'd like to issue a challenge to startup lawyers. When you have a seed stage company that needs to incorporate and close a seed round where all parties are willing to close on a set of standard docs without negotiation and where the investors agree to go without counsel, I think the legal fees for such a transaction should be $5000 or less. I just don't see why it should cost more than that.
The complaint used to be that VCs would negotiate everything and then whatever the VCs didn't negotiate, their counsel would negotiate. Well our firm and many other firms who invest at the seed stage have taken that criticism to heart. We don't behave that way these days and many of the firms we invest with don't either. But the fees have not really come down dramatically like I had hoped they would.
What more do we need to do to get to a $5000 legal fee for an incorporation and seed round?
When an entrepreneur gets a $500k or $750k or even $1mm seed round every dollar counts. And $15k, $20k, $25k of legal fees hurts. That's one less developer working for three months. Think about what a developer can build in three months.
I'm not talking about follow-on rounds where things get more complicated and round sizes go up. I'm talking about the first money a company gets when the company needs to incorporate, set up a bank account, and get real. I'd like to see $5000 of transaction costs. What do we need to do to get there?
