Who pays legal fees in a convertible note or SAFE financing and how much does it cost?
Takeaway: Convertible notes and SAFEs are cost-effective ways for startups to raise money. The company and the investor usually pay their own legal fees (unless it’s a more complicated transaction) and the fees typically run in the $10,000-$20,000 range depending on the firm you work with.
Convertible promissory notes and Simple Agreements for Future Equity (SAFEs) are popular financing instruments for startups, providing a means to raise capital with flexibility for both founders and investors. As with any financing transaction, legal fees are an essential consideration when structuring and executing convertible promissory note and SAFE financings. In this post, we will explore who is responsible for paying legal fees in these financings and provide an overview of the typical costs involved.
Legal Fees in Convertible Promissory Note and SAFE Financings
Legal fees in convertible promissory note and SAFE financings cover a range of services provided by attorneys, including drafting and negotiating the financing documents, conducting due diligence, ensuring compliance with applicable laws and regulations, and providing legal advice throughout the transaction. These fees can vary significantly based on the complexity of the financing, the experience and expertise of the legal counsel, and the specific requirements of the parties involved.
Who Pays for Legal Fees?
Most often in convertible promissory note and SAFE financings, each party pays their own legal fees but sometimes investors negotiate for the startup to pay up to a certain amount of their fees (typically no more than $10,000). The responsibility for paying legal fees in convertible promissory note and SAFE financings can depend on several factors, including the specific terms of the financing documents and the negotiation between the startup and the investor(s). In general, there are three possible scenarios for the allocation of legal fees:
The Startup Pays: In some cases, the startup is responsible for covering all or a majority of the legal fees associated with the financing transaction. This is because the startup is typically the party that requires legal services to draft and negotiate the financing documents, ensure regulatory compliance, and provide legal advice throughout the transaction.
The Investor(s) Pay: In other cases, the investor(s) may be responsible for covering their own legal fees, particularly if they engage separate legal counsel to represent their interests in the financing transaction. This scenario is more common in larger financing rounds or more complex transactions where the investor(s) have a significant stake in the startup and require specialized legal advice.
Shared Responsibility: It is also possible for the startup and the investor(s) to share the responsibility for legal fees, with each party covering their own legal costs or agreeing to allocate a specified portion of the fees between them. This arrangement is typically negotiated and agreed upon in the financing documents.
Typical Costs of Legal Fees
Convertible promissory note and SAFE financings are oftentimes cost efficient ways of raising money. However, the cost of legal fees in convertible promissory note and SAFE financings can vary widely depending on the complexity of the transaction, the experience and expertise of the legal counsel, and the specific requirements of the parties involved. Some general cost ranges include:
Simple Transactions: For straightforward financings with minimal negotiation and due diligence requirements, legal fees can range from $5,000 to $15,000. This estimate includes the drafting and negotiation of the financing documents, as well as basic legal advice and regulatory compliance services.
Complex Transactions: For more complex financings involving multiple investors, extensive negotiation, or additional due diligence, legal fees can range from $15,000 to $50,000 or more. The higher cost reflects the increased level of legal work and expertise required to navigate the complexities of the transaction and ensure the interests of all parties are adequately protected.
Conclusion
Understanding the allocation of legal fees in convertible promissory note and SAFE financings is an essential consideration for both startups and investors. The responsibility for paying legal fees can vary depending on the specific terms of the financing documents and the negotiation between the parties, with possible scenarios including the startup paying, the investor(s) paying, or shared responsibility.
It's crucial for both startups and investors to be aware of the potential costs associated with legal fees and to budget accordingly for these expenses as part of the financing transaction. By engaging experienced legal, startups can ensure that the legal fees are reasonable and that there is clear communication between the parties.