Ask HN: $10k in legal fees for a seed round – is that a joke? | Hacker News Reader

Ask HN: $10k in legal fees for a seed round – is that a joke?

24 pointsadamzerner18 comments

I'm reading http://venturehacks.com/articles/debt-benefits (cost section) and http://www.startupcompanylawyer.com/2007/05/13/who-pays-legal-fees-in-a-convertible-note-bridge-financing-and-how-much-does-it-cost/. What I'm getting is that you'd be lucky if you paid under $10k in legal fees for your seed deal. Is that a joke?!!!!!

I'm a student at Pitt, and am starting a website (http://www.collegeanswerz.com/) to make better college reviews. I'm looking to raise about $60,000 in the next few weeks so I could pay people to answer questions. It seems ridiculous for me to pay 1/6 of what I'm raising in legal fees.

Am I missing something? Are these sorts of fees typical? If so, how does that make sense?

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They used to be, and still can be -- if you have a bad investor who wants to play hardball (hint: don't play that game). It doesn't take much to run up $10k in legal fees if you have a problematic negotiation.

That said, there are a lot of resources out there now (convertible note generators, "standardized" series AA paperwork, etc.) that can lower this cost substantially if you try. Wilson Sonsini has a note term sheet generator [1], and there are probably others.

Also, keep in mind that many reputable, startup-savvy lawyers will work on a deferred fee for this kind of thing. You can also negotiate prices for simple contract reviews.

[1] http://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/t...

What is the least amount of money that you could get away with? Do you even need a lawyer for a seed round if you're not doing anything fancy?

You don't technically need a lawyer, but I would advise you to retain one.

Even if raising money with a convertible note, and using the community documents, you'll still need someone to file your Form D, prepare your board consent, and ensure all i's are dotted and t's crossed. You don't want to run afoul of the SEC.

Is your corporation established? Are you authorized to sell shares?

If you bring your own paperwork, you should be able to get away with <= $5k via a negotiated fixed price or cap on the legal work.

Some firms are also willing to defer payment up to a certain amount and/or until you raise additional funds down the line.

So do most people invest a couple thousand dollars in legal fees? What about kids for whom that would be over half of the money they have to their name?

Yes, startups typically retain counsel to assist with incorporation and fundraising. Mistakes made early on can come back to haunt you.

Check with your school. Perhaps they have an entrepreneurship program that can help?

This is not uncommon. Incorporation alone will cost you around $1-2k, after all filing fees, services, etc. are included in the cost, and you need to do that before anything else.

I recommend using something like clerky.com for incorporation and post-incorporation setup. They might also be able to help you with the later parts of the process.

As far as the cost goes...you gotta spend money to make money. Don't do any of this until you're absolutely sure that you have committed investors, and you'll minimize your risk.

I have taken investment from people I trust using boilerplate convertible notes that I know and understand.

The "people I trust" part is important, as is the "that I know and understand" part. Common sense dictates that you probably don't want to take investment on terms given to you by a total stranger that you don't fully understand.

If you've never done this before and/or you don't understand the docs you're using, you should probably consult someone who does.

There are several alternatives to paying expensive lawyers for what should be a very simple deal. The best two in my (non-lawyer) opinion:

* Techstars has free documents to use - http://www.techstars.com/docs/

* Fenwick and West (Prominent SV law firm) have posted their version of startup docs on GitHub - http://venturebeat.com/2013/03/06/fenwick-west-github/

Just get your investors to agree to a standard, simple deal and everyone will be better off.

We used Clerky for something recently. They took a process that would have been complicated, costly, and fraught with anxiety in the past and made it near-effortless for a ridiculously low price—really a commoditized price. I can't imagine what challenges they must face figuring out how to scale that in the market, but the benefit to customers is so huge that if they pull it off it will be the rare thing that deserves the term "disruptive". You might want to check whether they offer what you need.

You should be using Clerky for a convertible note financing. It should cost you just a few hundred dollars total and won't require lawyers.

I see that their convertible note financing is in beta. Could I still use it? And I think I'd still need to do some incorporation paper work, but it seems like with Clerky, this all could be done for under $1,000. True?

One of the cofounders here - feel free to shoot us an email and we'll see if we can help you out! The company formation stuff (which should be done before you issue any notes) will be a little under $700 including third-party fees.

I plan on doing so when I get closer to raising money, which will be in a few weeks. I was just doing some preliminary research today and got scared when I thought I'd have to dump all my savings into this, but it's reassuring to know that you guys are around!

My startup is at the same stage as yours... I need seed capital to take it to the next step. (I'm building an HTML5 competitor to GoAnimate.com/PowToons and need to pay for artwork)

My plan is to do contract work to pay for artists. Since you don't live in the Valley and you don't have a team of ex-Googlers working with you... you either need to show off paying customers, or get ridiculous amounts of traction to have any chance of getting funding. Otherwise people might not take you seriously.

But maybe that's just my opinion, and other people have different experiences.

Good luck with your startup! I like the need you're meeting. Videos are important, and they're not easy to make. It's something I've thought about before, but I don't have the technical skills to implement it.

I actually think I'll be fine getting funding. 1) I'm confident that I have something people want (better college reviews). 2) I plan on offering $100 to the best answerer, and $20 to the 5 next best answerers, and doing this for every school (I've exhausted the methods of getting kids to do it for free, and it's not working). I'm pretty sure kids will be willing to answer questions with this incentive. I'm gonna use my own money though to test it at 5 schools to prove that this method works. 3) 2) shows that they could fill out my website's content by giving me a $60,000 investment. If investors believe in 1), then success should be pretty simple.

I know that some larger law firms have processes to give you "free" legal representation. I have worked with a large law firm before that was willing to take on promising start ups in exchange for a note (converted during the next round). The additional benefit of this type of arrangement is that their Rolodex is usually pretty deep, and they have business analyst that will match you up with investors that "fit" your startup best. If you want more info about what the details of my arrangement where email me.

FYI - you do not have e-mail visible in your profile. You need to put it in the About textarea.

I'm pretty sure the juvenile spelling of "answerz" will end up costing you more than $10k.

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