I noticed a post over on Venture Hacks that suggests that a company absorb an investor's legal fees (via dilution) as part of a financing, and while some of the advice is sound, I've got the opposite opinion. In no particular order, here are my thoughts:
- First, cash on hand is not the same as cash obtained as part of a round of funding. Depending on the structure of the round, the cash from funding probably comes with liquidation preferences and various other privileges, meaning that the investor receives a multiple of their investment before lower classes of stock participate in the proceeds of a sale. The exact impact on the bottom line for existing investors might end up being small in the event of an exit at a significant multiple, but it will take a big bite in the event of a less favorable exit or a down-round in which anti-dilution provisions kick-in.
- If you get sob stories from your potential investor about their level of planning or unruly limited partners, run away. If you get any sob stories from them at all, run away. Fast. A weak member on a small team can ruin you, let alone someone with a Board seat and a strong set of additional rights and privileges.
- As an entrepreneur, you need to be a revenue animal and a cash bastard. You should be repulsed by the idea of letting someone else spend your money (present or future) on counsel (or anything else!) without your direct oversight.
- As a potential investor and subsequently as a shareholder, the investor's interests and the company's interests are not equivalent. It's improper to spend the company's money (cash or stock) protecting the interests of any third party or single class of shareholder. It would be legitimate to spend the company's money on generic offering documents, but not counsel for a third party reviewing or amending those documents.
- It's your obligation to run a tight ship, and it should be easy (ergo quick and inexpensive) for a potential investor to review your accounts, minutes, and agreements.
Finally, it rubs me the wrong way and sets off various alarms about being not quite correct. In any negotiation, each party should bear their costs, have counsel directed to protect their interests, and when they're all done, the dollars and cents should get recorded in their proper places.
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