In both cases VC money is being used to pay the VC's fees. If the startup pays the fee, then the VC funds the startup and the startup writes a check. If the VC pays the fee, then the VC will negotiate a slightly different deal for the same amount of equity. VCs prefer the first option because they can show lower operating costs to their fund investors. Some startup founders prefer the second option because they don't like the appearance of paying for someone else's legal costs. In both cases the costs of the deal are borne by the deal participants; the question is merely which company's financial statements show the costs.
in practice, VCs are freer with legal fees, esp when bigger (big fund, corp, inexperienced, etc). article is right that lawyers reinterpret cap as 'target', so only choice is moving to VC's side, so any waste above cost of signing stock forms (...the excess) is borne by the VC. if it is say a corp vc who doesn't ultimately care, the inefficiency is kept out of the deal. if the VC doesn't want the inefficiency either, it is now squarely their responsibility. it can still get put into the invisible valuation math by the VC, but at least now in a comparable way across term sheets, and pressure for more competitive (efficient/low) pricing.
jumping legal for 0k-10k into 20k-100k can sound like nothing to the VC side, esp the bigger ones, or maybe a reader here who is a FAANG employee, but to a lean startup, that is significant headcount. deal efficiency at preseed/seed is a real thing.
Great point that some VCs will be less concerned about transaction costs than others. Also that some startups will be more concerned than others. Where the amount of concern over fees differs, there may be more controversy over how the fees are paid.
Also if the fee is not capped and the startup will pay, the startup is right to be concerned about the fee eating into their post-deal capital.
It's not the highest-order bit for knocking it out of the park, but is already material for daily operations and for one of the biggest factors: team. Scoffing at $50K on $1M means the investor doesn't truly get early stage basics like payroll & compounding. Demanding lazy lawyer fees is explicitly asking to be a "partner" that eats the seed corn, and starts doing it even before anything is signed.
The investor ultimately doesn't care because they win when 9 portfolio co's fail and only the 10th nails it. In contrast, founders only have one company, and it can only burn $10-50K on stupid contracts so many times before payroll breaks, and each time is at the expense of compounding effects.
The founders and investors are both interested in the company being adequately funded to reach its next stage. So if the founders’ plan requires an extra $50k, then they should ask for more money. If the investor doesn’t want to give it to them, then maybe they should find a different investor or change their plan.
I think I touched a nerve ;-) Founders want to do the most with what they can in their one shot, while investors can play faster and looser across their portfolio, such as burning $50K here on nonsense. Not all, but enough that this article + thread exists.
Most VC-funded co's are bay area, so I was guessing $140K base + $100K RSUs (which are effectively cash) => $240K based on what I recalled about big companies here. But looks like $260K for someone just a few years in (L4) and $350K for folks senior enough to be real leads (L5). Funded co's are the top 1%, so that's arguably some $600K folks (L6). Also, I didn't adjust for being in a top 1 market (bay area) or 2nd tier (nyc/seattle/austin/...) vs Other. But either way, yeah, you're right, > 50% discount for those #'s ;-)
I would say most of the companies on levels are not in the same league as your average startup and do not attract the same talent nor need to pay so well.
You can't measure on average only on the top tier, and to compete with it would be foolish IMHO.
Only 0.5-1% of startups get picked for VC funding, and even less to Series A etc., so there is a bit of a weeder on that side. On the other side, with multiple top tech companies being 100K+ employees, being at one long enough to lead a team or project is not that selective.
I do agree that competing based on compensation is generally foolish, with only exceptions like being funded by the top 1% of VCs who like to compete by overspending. Hence, 50% paycut.
>> Funded co's are the top 1%, so that's arguably some $600K folks (L6)
> Only 0.5-1% of startups get picked for VC funding
This is a big misunderstanding. The rate at which pitches get picked up for funding is not related to the rank of the engineers that the startup would hire. Startup engineers tend to be either younger and inexperienced or experienced, but average (i.e., not top-earners at big tech). In either case, they are risk-seekers who are willing to take lower salaries in exchange for equity with a slim chance at making it big. Startups are, generally speaking, under strict financial pressure. They usually can’t afford to pay market rate, let alone big tech (“We need the best people in the industry at any cost”) rates.
That's a hell of a claim I'd be curious to see backed up. In a sense, one of the first tests for a funded founder is hiring folks at below-market (my initial 50% estimate) who still outperform others.
Those levels.fyi compensation reports are distorted growth in the value of RSUs. At time of hire, RSUs are typically allocated at about 10-20% of total compensation. In the case of many reports on levels.fyi, particularly high-growth tech companies like Facebook and Google, stock prices have multiplied in value several times over. So for those companies RSU compensation can jump to 50% or more of total compensation. That is not typical at all.
Levels.fyi data is also distorted because data is self-reported. Higher-earning individuals are more likely to report because it is a form of bragging. Similarly, lower-earning individuals are less likely to report. Also, workers generally want to increase the perception of higher average compensation to gain an advantage in salary negotiations.
A better general point of comparison may be the salary reports put out by HR consulting firms like Robert Half [0]. Those reports can be of limited usefulness, however, because they report very broad categories and salary ranges. Still, they're useful to know about because those reports are what Company X will cite for why they can't pay you what levels.fyi says is the average pay.
This may be true, however, the investors pick the lawyers and the lawyers work for the investors. The investors manage their work, controlling how much is spent. The investors have limited incentive to keep the costs down.
