What is a good range for the legal fees on first round of investing?

We recently closed a first round of investing for 3 million and paid in excess of 150k for our legal fees. We used a reputable firm and were lead to believe that the costs would be around the 50k in the early stages of the transaction. When the legal fees mounted our lawyers blamed the investor for being very aggressive which required several rounds of negotiations. We found it very difficult trying to keep the legal fees under control and manage the lawyers.

What has been your experience? Should we have tried to negotiate a fixed fee up front? Do any legal firms work on a fixed price basis? What should a startup getting the first round of investment do to keep the transaction fees low?

Thank you for your help.

$150K is outrageous. Are you on the East Coast? Here in California, numbers like that are unheard of.

And did you also have to pay the investor's legal fees? If so were those more than $50K?

The idea that 5-10% of the investment amount went to legal fees is appalling.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

Lawyers may work on a fixed fee basis. I do for certain types of matters, but I have never done so for a financing round. But if a lawyer gave you a fixed fee to negotiate a financing, the scope of work in the agreement will usually limit how much time the lawyer is required to put in. For example, the scope of work might limit the number of times the documents will be revised, how many conference calls, etc. Like mechanics, contractors, software engineers, and others that work on estimates, the minute something changes in the process, the lawyers will be alerting you that the scope of work has changed and therefore the price has changed.

You suggested your lawyers blamed the increased fee on aggressive investors, but you didn't mention if that is true or not. $150K strikes me as very high, even for a big firm, but it may have been justified. Did they seem like they were just spinning wheels, or were they keeping you informed of why the negotiations were dragging on? If they ended up 3X over budget but the supposed justification is flimsy, you should really find a lawyer you can trust, fixed fee or not.

You have to think about aligning incentives when working with lawyers. On the one hand, giving a large firm carte blanche to over-lawyer your matter is probably not a good idea. On the other hand, if you negotiate a strict fixed fee which the scope of work eventually exceeds, you are now asking the lawyers to work for you for free. They will have an incentive to get out of the negotiation as quickly as possible, and if you are dealing with an aggressive investor, that may not be the best situation for you. My view is that there are many experienced lawyers that are solo or at small firms that will negotiate your round at the best cost possible while keeping you informed of exactly what is going on with both the negotiation and the fee. Find someone you trust and can work with, and they will be a valuable resource now and going forward.

A little context on what others say is typical cost. Yokum Taku at WSGR says a Series A financing typically runs 50-60K, and can be much higher if there are cleanup items outstanding. Plus, the company usually pays investor's fees, which can be 25-35K or more. http://www.startupcompanylawyer.com/faqs/ VC's Brad Feld and Jason Mendelson report in their book "Venture Deals" that a financing can usually be done for 25-40K, but that lawyers in large cities will charge more (they are in Boulder). They also note that cleanup items will increase the fees.

I note this to point out a couple of things. One, the idea that a $3M Series A can be done for 10K is well out of line with anyone's realistic expectations. Two, I think the 50K originally quoted to you is what experienced lawyers and VCs expect, at least in the Bay Area. Three, the idea that a financing will cost the company 100K or even more is not unheard of, particularly if there are lots of outstanding cleanup items (such as re-capitalizing the pre-money structure, re-incorporating or converting the company, cleaning up the IP ownership documentation, etc.). The fee can go a lot higher, too, if the investors require an opinion letter (they are not typical these days, but do come up when the company's documentation is a bit of a mess, and might add 15-25K at a large firm). The question of whether it is outrageous is fairly dependent on why it cost so much, not just the cost itself.

I'll go back to my original point: if you get a bill of 150K but honestly have no idea as to why it went so high, that is problematic. But that is not to say that any time someone pays 150K in legal fees it is because they are getting ripped off... often there are very good reasons why the bill was so high. The best way to reduce the overall cost is to i) get an experienced attorney from the start that can help you avoid a lot of those clean-up problems, and ii) stay involved with the process and understand exactly why the costs are going up.

In answer to your question about keeping fees low, any firm that works with startups should be able to work with you on alternate payment plans. Here are some things that I've done: (1) Fee caps (These are always higher than my estimate, to provide me some protection), (2) Sliding fees: First 50 hours are at $X; everything after that is at $X/2, (3) accepting stock as partial payment. While I do flat-fees for some types of legal work, I don't generally do it for financings -- just too many unknowns. The key is to ask about this up-front.

It's conceivable that events popped up to jack up the fees and certainly obstinate investors could easily do that. And, if there are arguments over the disclosure schedule, that could boost your rates. BUT.... In general, the only time that I see rates in that ballpark for a private offering is when somebody insists on drawing up a full-blown Private Placement Memorandum. Hard to tell without knowing all the facts of your situation.