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Comment by lpolovets | Hacker News Reader

This is a good post, but the one thing that stuck out at me is the $60k Series A figure. I have no doubt it's true, but comparing priced Series A legal costs to seed stage SAFE legal costs is apples to oranges. No one is debating using SAFEs for Series A's, as those are already priced rounds ~100% of the time. For a priced seed round, I've heard legal costs can vary from $5k to $20k or so. That's not insignificant, but it's way lower than $60k.

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IMO the largest costs aren't the dollar costs, in fact those barely matter. The large cost to me as a founder are the weeks/months it takes to negotiate a priced round when there's so little data is borderline exercise in futility and so much work that needs to be done by exactly the person that would need to handle those negotiations. But that's more abstract than putting a solid "$60k" number on something.

And why is that cost on the founders? Is that true for your investments as well?

Jon's post notes that this is the industry standard. Anecdotal, but my experience matches that claim (last data point being end of 2016).

I've never encountered any compelling rationale as to why/how that standard emerged.

I've been a VC for about 5 years and tbh I don't know why this industry standard exists. It's not something that makes sense to me. I think it would be a good change for the industry to get rid of this practice, and I think the change should come from the top (e.g. the National VC Association or from a group of leading VCs).

Appreciate the reply, thanks! Any thoughts on my other question at the top of the thread - https://news.ycombinator.com/item?id=14746570

Usually valuations are determined more by the investors rather than the founder. That might sound unfair, but investors have much better market comps. (Kind of like how you might think your house should be worth $X, but a real estate agent will tell you it's worth $Y, and their guess is usually better than yours.) If there are lots of investors vying to get into a round, then the founder has a lot more pricing power.

Market terms for a seed round are either 1) a priced round, or 2) a SAFE or note with a cap and a discount. 20% is a typical discount. A typical cap, in Silicon Valley, would be $4m-$5m on the lower end (idea or prototype phase, little or no market validation) up to $8m-$10m on the higher end (product is live in the market, has decent usage, and perhaps $25k-$75k MRR if you're b2b). There are also outliers that are >$10m cap -- usually those companies have exceptionally strong growth or founders.

In practice, SAFE/note discounts don't come into play that often but caps do. That is, next rounds are usually significantly higher than the cap (and the discount doesn't apply).

Similarly, why do sellers pay closing costs for houses? Makes zero sense. The money is flowing from the buyer to the seller. It also inflates the price of the house since the buyer has to pay the seller to pay the closing costs. Then you have to pay mortgage interest and property tax on that inflated value.

I paid closing costs when I bought, and as my realtor said, it's like free cable. It's not a massive savings but it's free cable every month.

Having the seller pay closing costs essentially allows the buyer (the buyer always pays transaction costs from an economic perspective) to pay the closing costs through the mortgage. I.e. the house costs 10% more, but you can mortgage it, instead of an extra 10% out of pocket.

The rationale, from the VC's perspective for the company paying for a priced transaction is the same. Really this is a way of making the LPs of the fund pay for the transaction (i.e. their money given to the company to pay the transaction) rather than the VC having to pay transaction expenses out of their fees.

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