Debate Ignites Over Venture Capital Legal Fees: David Cramer Calls for VCs to Cover Costs

A recent tweet from David Cramer, co-founder of Sentry and an active angel investor, has reignited a long-standing debate within the venture capital ecosystem regarding who should bear the legal fees in fundraising deals. Cramer's "hot take" asserts that "venture firms should always pick up the legal fees on all fundraising deals," adding, "you already get a passenger seat on the success of everyones businesses, the least you can do is pay the toll." This statement challenges the prevalent industry practice where startups typically cover the legal expenses for both their own team and the investing venture capital firm.

The current norm sees startups, particularly from Seed or Series A rounds onwards, paying the legal fees of their investors. This practice is often justified by VCs who differentiate between their fund budget (for investments) and their much smaller operating budget (for firm operations). Paying deal-related legal fees from the operating budget, which is typically derived from a 2% annual management fee on the fund size, can significantly impact a VC firm's operational finances.

Cramer's perspective highlights the financial burden placed on nascent companies. For a startup raising capital, even a seemingly small legal fee of $25,000 to $50,000 for the investor's counsel can represent a notable portion of their newly acquired funds, effectively reducing the capital available for core business development. This sentiment resonates with many founders who view it as an additional "tax" on their fundraising efforts.

Conversely, some VCs argue that passing on legal fees to the startup helps preserve investable capital within their fund and provides a "soft incentive" for all parties to control legal expenses. Despite this, a small but growing number of "founder-friendly" venture firms, such as K9 Ventures, Afore Capital, and Bloomberg Beta, have opted to cover their own legal costs, often as a differentiator or when dealing with less complex instruments like SAFEs (Simple Agreement for Future Equity).

Emerging technologies are also influencing this landscape. Legal AI solutions, like those offered by Genie AI, have demonstrated the ability to drastically reduce legal costs for startups by automating document drafting, review, and negotiation. For instance, AnthroTek recently closed a £950,000 seed round using AI, cutting legal fees by 90% and accelerating the process. Such innovations may eventually shift the economic dynamics, making it more feasible for VCs to absorb their own legal expenses. The ongoing discussion underscores the evolving nature of venture capital practices and the continuous search for more equitable and efficient fundraising processes.