A common provision in venture funding agreements (it’s usually in the term sheet) is that the company pays the investor’s legal bill. It’s annoying, but quite typical.
Let’s say you’re raising a $1m round, and have to pay the investor’s $25k legal bill. So, in effect, you’re raising only $975k, but you’re giving up $1m worth of the company to get it. Why doesn’t the investor just give you $975 and pay their own expenses?
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). For this reason, investors are generally incented to pass as much company-related expense as they can through the company.
In most cases, the amount reimbursed by the company can be capped. (And a low cap can help keep the investor focused on keeping the investment terms simple and the legal bill reasonable).
there’s another reason VC firms pass on the legal expense — allows them to pay themselves more as they keep more of the management fees they collect from their investors.