Ask HN: Fundraising, why do investors make companies pay for their legal fees? When I was fundraising for Tindie, we had to cover our investors legal fees. For first time founders this norm can be a shock. I know it was for me. Having been a few years since I've had to fundraise, time to kick this can. Why in the world do startups have to cover the legal costs of their new investors? Please tell me there is a good reason for this ... bc all I can think is that it is to pad their returns... |
"To be clear, the term requiring startups to pay for investor counsel fees is unjust. This is because startups are forced to pay the legal fees of the counsel negotiating against them. "
I wonder if YC would start pushing investors to stop this practice
Paying the investor's legal fees is consistent with investing for cashflow. This is by far the most ordinary investment model. It is expected that returns are periodically realized cash.
Another investor model is to realize profits through capital gains -- not uncommon with Silicon Valley investors, but less common elsewhere. Taking capital out of the target investment at the start provides lower expected return because that money doesn't compound within the company.
Basically, the difference is that one investor sees better investments outside the company and the other doesn't. Good luck.