Put away your wallet, startup. Spark decides to cover its own legal fees

By Sarah Lacy , written on April 24, 2013

From The News Desk

As startups have become more capital efficient and seed funds have proliferated, the battle for the best early stage deals has intensified. That's led to an arms race among early stage VCs to prove how entrepreneur-friendly they can be. Some have hired armies of recruiters and PR professionals to help startups out for free, others promise quick closes with advantageous terms. Y Combinator has even standardized protections around handshake deals.

In this competition to be pro-entrepreneur, Spark Capital is about to score big points today. The firm is announcing that it's going to pay the first $25,000 of its own legal fees when it's closing deals with new companies.

Paying your own bills? To people who haven't started a company? That may sound about as chivalrous as putting your own coat down when you need to cross a puddle of mud.

But oddly enough, the standard in the venture world is that the startups pay not only their  legal fees, but the investors' legal fees when a deal is closing. These can be tens of thousands of dollars of incremental cost -- regardless of whether a company is raising $50,000 or $50 million.

First time entrepreneurs are usually taken aback by this. They've just hustled to get a few hundred thousand dollars, and now they have to pick up the legal tab for the VC who is sitting on billions in assets? That was certainly Bijan Sabet's reaction when he was working at startups, starting in the mid-1990s. But he was told it was just the way things were done. Now as a partner at Spark, he finds himself having to explain it to startups, and it's always felt uncomfortable to him.

Recently, he was trying to explain the unspoken rule to yet another new entrepreneur, and he realized he was struggling to articulate an argument, because he still doesn't believe it's fair. So he went to his partners and suggested that Spark break with convention and pay its own legal way on new deals. His partners reacted with everything from "Duh! Why haven't we done this sooner?" to concern that there'd be backlash from other investors.

They realize once they do this, they can't take it back, so Spark is both trying to be bold and cautious at once. They've limited the amount of legal fees per company to $25,000, which might cover one deal or multiple deals. The idea is to give young companies a break. To a more mature company, $25,000 may not matter much. But to a new startup, it absolutely does. As Sabet wrote in his blog post on the topic, "We would rather these startups spend less time and money in the documents and contracts and more time focused on building their business. And we want our own actions to be consistent with that objective."

To Sabet's knowledge and my knowledge no other venture firm has done this before as a policy, although VCs will occasionally make exceptions for top entrepreneurs.

That said, the unnecessary expense around legal fees is something that the startup ecosystem worked hard to address in recent years. Fenwick & West has created and open sourced Series Seed documents that give investors and startups standardized terms that cut down on costly and unnecessary back and forth. AngelList has produced its own cheap and easy forms for closing investments. A disdain for unnecessary legal costs also fueled the rage around convertible notes in recent years, as they require less wrangling than a standard equity agreement.

All of this has lowered the legal fees for many early stage companies. But to Sabet it was really nibbling around the edges of the problem. As a former entrepreneur, he hopes the bold move forces other investors to follow suit.

[Illustration by Hallie Bateman]