What should legal fees in a Series A financing be?

December 8, 2007

Company counsel legal fees in venture financings have increased since the 1990s. Legal fees in Series A venture financings routinely exceed $50K, and fees easily exceed $100K in complicated and later stage financings. In my experience, many companies also need to complete some corporate cleanup in connection with venture financings, especially with regard to capitalization matters, which leads to increased costs. Generally, working with competent counsel will be less expensive than fixing problems later or dealing with deferred housekeeping at the time of a venture financing.

Please keep in mind that the company also needs to pay legal fees for investor counsel. This is because venture funds receive a management fee of 2% to 2.5% for managing the money, which pays for day to day operating expenses of the fund, such as salaries, office space and other costs. Venture funds do not want legal fees to be paid from management fees and instead want them paid from the fund itself, via the portfolio company. Sometimes investor counsel legal fees are deducted from the wire transfer that the company receives upon the closing of the financing. Occasionally, venture funds will try to have the company pay legal fees even if the financing does not close.

Legal fees for investor counsel may be capped in routine financings, although some venture funds will not cap legal expenses and will expect payment of “reasonable” expenses. These caps may be as low as $20K or range as high as $100K or more in complicated financings. If investors need to conduct specialized IP or regulatory due diligence, fee caps or expectations may be higher, as the investors may engage separate patent or regulatory counsel to conduct due diligence.

Fees for company counsel are typically 2X investor counsel fees because company counsel (at least on the west coast) typically drafts financing documents, coordinates due diligence and delivers a legal opinion, which requires more work than investor’s counsel. In my experience, it is difficult to adequately represent an investor in a venture financing without incurring less than $25K to $35K in legal fees, simply due to the time necessary to review documents and conduct due diligence.

If investors are not represented by counsel, such as in some angel financings, then company counsel legal fees can be significantly lower. This is partially due to the lack of back and forth negotiations among the attorneys and also due to the fact that these companies may be fairly early stage with few due diligence issues. In my experience, I believe that it would be difficult to complete a simple angel Series A financing for less than $20K to $25K on the company side.

Please also see the post by Jason Mendelson on Ask the VC answering the question: “How Much Should I Pay Lawyers to Complete My Financing?”  Dick Costolo has a humorous (and fairly insightful) post about legal fees entitled “Legal Fees: Start Swearing Now.”

In any event, actual mileage may vary.

Comments

  • nomorehighfees

    We just closed Series B and our counsel just charged us over a $100K. It was a big round and our counsel is one of the bigger, established players in the valley. I do think the number is high and i want to push back.

    On a separate issue, do you think establishing billing guidelines and getting the lawyers to sign it (i know they will push back hard) is a good strategy? I think just a routine email asking to establish transparency is probably not going to be an effective strategy. For a pre-revenue company, we are paying close to $30K a month for legal work (excluding the $100K on Series B). I have to get serious about this issue.

  • http://www.startupcompanylawyer.com Yokum

    The median cost of the Series B financing in 2008 (based on 64 deals) was $75K. Thus, $100K wouldn't surprise me if there were a difficult issue or two in the financing.

    $30K/month in legal seems high for a typical Series B-level startup. I suspect you have a lot of patent, regulatory, licensing or litigation work. Only a very few large companies with multiple outside counsel have seemed to develop billing policies that they expect their outside counsel to adhere to. I think that the best you can do is ask for estimates and updates on the bill on a regular basis. I'm not really sure how billing guidelines would be effective with a typical startup.

  • nomorehighfees

    We just closed Series B and our counsel just charged us over a $100K. It was a big round and our counsel is one of the bigger, established players in the valley. I do think the number is high and i want to push back.

    On a separate issue, do you think establishing billing guidelines and getting the lawyers to sign it (i know they will push back hard) is a good strategy? I think just a routine email asking to establish transparency is probably not going to be an effective strategy. For a pre-revenue company, we are paying close to $30K a month for legal work (excluding the $100K on Series B). I have to get serious about this issue.

  • http://www.startupcompanylawyer.com Yokum

    The median cost of the Series B financing in 2008 (based on 64 deals) was $75K. Thus, $100K wouldn't surprise me if there were a difficult issue or two in the financing.

    $30K/month in legal seems high for a typical Series B-level startup. I suspect you have a lot of patent, regulatory, licensing or litigation work. Only a very few large companies with multiple outside counsel have seemed to develop billing policies that they expect their outside counsel to adhere to. I think that the best you can do is ask for estimates and updates on the bill on a regular basis. I'm not really sure how billing guidelines would be effective with a typical startup.