A common provision in venture funding agreements (it’s usually in the term sheet) is that the company pays the investor’s legal bill.\u00a0 It’s annoying, but quite typical.<\/p>\n
Let’s say you’re raising a $1m round, and have to pay the investor’s $25k legal bill.\u00a0 So, in effect, you’re raising only $975k, but you’re giving up $1m worth of the company to get it.\u00a0 Why doesn’t the investor just give you $975 and pay their own expenses?<\/p>\n
By passing the expense through the company (by investing first, then having the company pay), the investor is getting additional equity for the expense, or equivalently, a small discount on the pre-money valuation (about 2.5% in the example above).\u00a0 For this reason, investors are generally incented to pass as much company-related expense as they can through the company.<\/p>\n
In most cases, the amount reimbursed by the company can be capped.\u00a0 (And a low cap can help keep the investor focused on keeping the investment terms simple and the legal bill reasonable).<\/p>\n","protected":false},"excerpt":{"rendered":"
A common provision in venture funding agreements (it’s usually in the term sheet) is that the company pays the investor’s legal bill.\u00a0 It’s annoying, but quite typical. Let’s say you’re raising a $1m round, and have to pay the investor’s … Continue reading