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Should The Company Reimburse Your Legal Fees?
If investing in a group, it is not uncommon for the lead investor to ask the company to reimburse its reasonable attorneys’ fees, subject to a cap. This gets more common the larger the size of the round. Venture capital funds almost always have companies reimburse their reasonable attorneys’ fees. Series A rounds very often have a fee reimbursement provision for the investors. It is less common in Series Seed rounds or convertible debt or equity rounds. That said, the Series Seed Documents is a commonly used set of fixed-price financing documents in early-stage investing; and it provides that the company will reimburse $10K in legal fees. The more you are investing, either individually or as a group, the more comfortable you should feel asking for this provision. If you are investing $500K, definitely ask.
Mitigating Risk When Using a Lawyer
Even if you don’t ask the company to reimburse your reasonable attorneys’ fees, or if you ask and the company declines, that doesn’t mean you should not use a lawyer. The trick is to use a lawyer intelligently so that you do not unnecessarily run up legal fees or upset the deal.
danger When you are using a lawyer, your risks include:
You might incur much more in legal fees than you reasonably expect.
Your lawyer might make unreasonable demands of the entrepreneurs, putting you at odds with the company, and jeopardizing your chance to make the investment.
How can you minimize these risks? With regard to fees, ask the lawyer to cap their fees. Get them to agree in writing that their fees for reviewing the legal documents will not exceed a set amount. With regard to the second risk, control the communications. Instead of having your lawyer communicate comments to the company, have your lawyer give you the comments. Then you can decide which comments to pass along to the company, or how to present them.
important The best legal comments are the ones that your lawyer can easily explain the underlying rationale for. If you can’t understand your lawyer’s comments, and why he or she is asking for certain changes, ask for a clear explanation from them so that you can evaluate whether to press for the change in the legal documents or not.
How To Find A Lawyer
The best way to find a lawyer in your community who is very practiced in the early-stage company space is to ask fellow angel investors whom they like to work with. If you don’t have a network of fellow angel investors yet, look up your local angel groups and reach out to them for recommendations. You could also ask company founders which lawyers they have heard are good in the community.* If there is a dearth of local legal talent working on startup deals, you might have to find someone to work with remotely in a bigger city in your state. Every state has angel groups, so you will always have a place to start your research on an experienced attorney.
dangerWorking with a lawyer who is not really practiced in early-stage investment is not a good idea. Your lawyer needs to know how these deals are typically structured, what risks to look for in a deal, and what is standard and market in the community for these types of transactions.