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Colin Devroe

Reverse Engineer. Blogger.

Early stage investors should pay their own way in most cases

April 26, 2013

Bijan Sibet:

For as long as I can recall, both as an entrepreneur and a vc, startups have been asked to pay their investors legal expenses related to their investment. Whether the company raises $500k or $5MM it has become “standard” that the company foots the investors legal bill.
I didn’t understand it then and I still don’t get it now.
Starting today we would like to change that.

Typically the question of “How much should I raise?” has always been a math problem. First, you need to figure out what your approach is. Like Wayne Barz piece lays out, you can raise nothing, raise just enough, or raise more than enough. But then there is all the costs associated with the act of raising money that you have to factor in.

So it would go something like this: How Much We Need + Fees = How Much To Raise.

What Bijan and his partners at Spark Capital are asserting would make the math easier for the company looking to raise money and, really, add very little to the bottom line for the early stage investors. What’s a few thousand in legal fees when you’re doing a half-million dollar deal or better?

For Plain we paid all of the legal fees of our investor. Because that’s what you do. It wasn’t much. But it took money “away” from us when, in reality, it would have been nicer and much more simple to have just raised the exact amount we thought we needed without doing much more math than we already had to. When things are simple for the entreprenuer there is more chance they’ll be able to succeed.

I hope more firms follow Spark Capital’s lead.