Prominent venture capitalist and entrepreneur Auren Hoffman recently voiced strong criticism against a common practice in the investment world: venture capital firms requiring portfolio companies to cover their legal fees within term sheets. In a recent social media post, Hoffman asserted that such demands are inherently "founder unfriendly." The tweet sparked discussion within the startup and investment communities regarding standard practices and power dynamics in funding rounds.
Hoffman, a General Partner at Flex Capital and a prolific angel investor, did not mince words in his critique. > "any VC that forces companies to pay their legal fees in their term sheet is, by definition, founder unfriendly," he stated. He further challenged the VCs employing this practice, suggesting, > "next time you get a term sheet like that, ask the VC if they are having money problems. forcing little companies to pay legal fees is an insult."
The practice of investors charging legal fees back to the startup is widespread in venture capital, often capped at a specific amount, such as $30,000. These fees typically cover the investor's due diligence and documentation costs. While some in the industry consider it a minor expense in the context of a multi-million dollar investment, others, like Hoffman, argue it represents an unnecessary burden on nascent companies.
The debate centers on what constitutes "founder-friendly" investment terms. Some venture capital firms, including K9 Ventures, Homebrew, and Bloomberg Beta, notably choose to absorb their own legal costs, viewing it as a gesture of goodwill and a commitment to truly founder-centric partnerships. Critics of the fee-charging practice contend it can disproportionately impact early-stage startups, diverting crucial capital from operational needs.
As a seasoned entrepreneur who founded companies like LiveRamp and made over 100 angel investments, Hoffman's perspective carries significant weight in the tech and venture capital ecosystem. His public stance highlights an ongoing tension between investor expectations and the financial realities faced by startups. The discussion underscores the importance for founders to meticulously review all clauses in term sheets, beyond just valuation, to understand the full financial implications of a deal.