A prominent venture capitalist, Fred Wilson, has a question: Why do lawyers cost so darn much?
That’s the gist of Wilson’s recent blog post, A Challenge To Startup Lawyers, in which he discusses a recent investment his fund closed, a seed round. The parties used standard form documents, without negotiation, and the investors had no counsel: “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 rather straightforward deal came to $17,000. That’s pocket change for a successful financier like Fred Wilson, but he still wasn’t happy about it. Given how little work was involved, couldn’t the legal bill have been even lower?
This experience led Wilson to come up with a challenge to lawyers who represent startup companies….
Here it is (emphasis added):
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.
It’s an issue with real implications for startup companies, as Wilson points out in his post:
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?
Readers, what do you think? Can Wilson’s challenge be met? And should it be met — or is Wilson being unreasonably cheap?
We’re reminded of an earlier controversy in the startup / venture capital world, when Gunderson Dettmer was “blacklisted” by a startup accelerator for alleged overlawyering. Gunderson lawyers were accused of such sins as billing for “cosmetic changes to template agreements.” But in the comments to our post, readers pointed out that (1) “nearly all startups view every change as ‘cosmetic’ even when it’s actually substantive,” and (2) representing startup companies can be difficult and challenging work.
Startup founders and investors often don’t appreciate how complex and perilous these transactions can be — they just want everything done cheap cheap cheap. But if you’ve seen The Social Network, you know bad things can happen when entrepreneurs don’t take all the proper legal steps to protect their economic interests.
We’ll leave you with Fred Wilson’s question: “What more do we need to do to get to a $5000 legal fee for an incorporation and seed round?” Your thoughts are welcome, in the comments.