Legal Fees for Startups - Fixed Pricing

I've moved to fix pricing for start-ups (and fee deferrals) for formation and initial financing.  This is what I do for companies:

1.  Formation - $2,500 - which includes company formation, founders stock issuances (including founders FF Preferred stock), option plan, offer letters for early employees and advisor and consulting agreements.  

2.  Bridge Financing - $5,000-$7,500- for a convertible note financing on standard terms, which I will help the company negotiate and provide coaching around.

3.  Angel Equity Financing - $10,000-$15,000 - there is more work here than a bridge financing, with representations and warranties, board composition provisions, stock restriction agreements between the founders and the investors, management rights agreement with investors, and legal opinion provided by Orrick.  The fees will be at the higher end of this range if the angels are represented by legal counsel and depending on the number of investors to coordinate closing.

4.  Venture Financing - 1.5X investors' counsel fees.  The first thing a company should do is keep the cap on investors' counsel fees to a minimum.  The more the due diligence and comments on documents from investors' counsel the more work we will need to do as company counsel to respond.  As company counsel, we will draft documents, prepare due diligence, finalize documents, coordinate the closing process with investors, make securities filings, and manage post-closing matters.

I will defer up to $15,000 of fees until the company has raised capital.  I work with companies to determine what the capital raise will be that triggers payment of fees to help them with their cash use.  As you will see from the above schedule, $15,000 will go a long way for companies.  My view is that greater fee deferrals is usually a red herring - it could mean that the law firm is not working efficiently.  We can get a lot done for $15,000 and going forward for our clients

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What are valuation ranges for pre-money caps on convertible note financings at the seed stage?

For companies raising money for the first time, and doing so under a convertible note structure, I am seeing valuations ranging from $1.5M at the low end to $5M at the high end, with $3M being the mid point for most deals.  This is the pre-money valuation that is included in the convertible note as the cap on valuation determined at the time of conversion into preferred stock.  Also, I am starting to see convertible notes at multiple valuation caps.  That is, the company first raises money on a convertible note with a lower valuation cap for the first money in (such as $2.5M pre) and as the company deploys the capital and builds value, then completing a second convertible note round at a higher valuation (such as $4M pre).  This flexibility is one of the benefits of convertible notes.  You can raise money at incrementally higher valuations as you build value, resulting in less dilution to the founders.  Let's see how mainstream this becomes because it is certainly an efficient way to raise capital.

Posted via email from John Bautista's posterous