Legal Fees in a Funding Transaction - Explained
What are the legal costs associated with a funding transaction?
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Legal Fees in a Funding Transaction
Legal counsel plays and important role in funding transaction. The process can be quite complicated and the counsel helps negotiate the deal as well as draft the applicable documents. The startup venture will always have counsel. In a seed round it is not common for investors to have counsel. In a series A round it is very common for the investor to have counsel as well.
The company generally pays for both company and investor counsel (or rather it comes out of the funding provided by investors). The amount the company is responsible for paying is generally capped (negotiated in term sheet) or subject to reasonable fees. The cost of a seed financing may be as low as $5,000, while the fees for a complicated late stage financing can be over $100,000.
Company counsel is generally more costly than investor counsel, as company counsel drafts documents and facilitates due diligence. The variation in price generally results from the degree of due diligence and negotiation between the parties. As expected, the negotiation is far more extensive and fees much higher when company and investor counsel are involved. The costs also go up when diligence reveal issues in the governance or intellectual property holdings that must be remedied.
As discussed in a separate lecture, legal diligence verifies financial (capitalization issues), operations (intellectual property), and regulatory issues. Counsel may not charge or reduce charges if the transaction does not class. If the counsel performs significant diligence, charges are certain. This may require contracting with specialty counsel to conduct the IP or regulatory diligence.
Back to: Business Transactions
What are the Legal Costs?
The venture funding process often requires extensive legal services. An attorney serves the role of helping each party:
- Understanding the important considerations,
- Negotiate the funding deal (often with the other party's counsel),
- Conduct or facilitate examination of the target company (due diligence), and
- Memorialize the transaction through drafting/reviewing legal documents.
The extent of attorney involvement varies depending on a number of factors, including:
- The stage of funding,
- Involvement of counsel (increased negotiation/document review),
- Amount of Due Diligence,
- Detail of drafting services required, and
- relationship be investors and entrepreneur (less negotiation).
The cost of legal fees are generally deducted from the funding received by the company. As such, the company pays for the legal fees of both parties. The investors counsel generally does not receive compensation if the deal does not go through. Also, the fees paid by company counsel may be capped at a specific dollar amount or as a percentage of the financing. In a series A financing it is common to see fees range from $5000 in a financing deal that requires little due diligence and drafting and up to $50,000 if there is extensive negotiation, diligence, and drafting.
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