How Much Should Startups Allocate for Legal Fees in a Family and Friends Funding Round?
The legal fees for a family and friends funding round can vary widely based on several factors including the complexity of the deal, the location, and the specific legal services required. Generally, startups can expect to pay anywhere from $1,000 to $10,000 for such rounds. Here’s a breakdown of potential costs:
Basic Documentation
If the round involves simple agreements such as convertible notes or simple equity agreements, the costs might be on the lower end around $1,000 to $3,000. These agreements are straightforward and can be drafted in-house with the help of a legal pro and a bit of research.
More Complex Structures
If the startup requires more complex agreements such as multiple classes of shares or specific investor rights, the fees could rise to $5,000 to $10,000. These agreements often involve unique terms and specific legal strategies that require a more experienced legal team.
Additional Services
If the startup needs additional legal services, such as tax advice or regulatory compliance, the costs could increase further. These services often involve ongoing support and can be quite substantial depending on the level of engagement required.
Geographic Location
Legal fees can also vary significantly by region. Major metropolitan areas often have higher rates compared to smaller cities. For instance, a startup in New York might expect to pay more than a similar startup in a smaller city like Raleigh.
It’s advisable for startups to budget for these costs early on and to seek quotes from multiple law firms to find a good fit for their needs and budget.
Real-World Examples
We are starting a friends and family round right now. After conducting thorough research and networking with other entrepreneurs, I learned that you can save money by doing a lot of the legwork yourself and having a pro review and edit the documents.
We went ahead and drafted a master shareholders agreement and bylaws to authorize the anticipated additional classes of stock for the future. This approach wound up costing less than $3,000.
Additionally, it’s helpful to ask fellow entrepreneurs in your area who used legal services and pick their brains. They can provide valuable insights and help you save money on the legal process.
Expert Advice
Adrian rightly pointed out that the budget for legal fees should not exceed ￡3,000. He suggests using a very simply modified set of the company’s articles with simple insertions for things like drag and tag-along rights. This approach keeps drafting to a minimum and can save significant amounts of cash. Often, you can find someone who has raised cash this way and they will share their agreement.
Adrian emphasizes that anything you draft at this stage is likely to be ripped up by a VC coming afterwards. It’s best to keep it vanilla and not give any concessions. Future investors will expect similar terms, and any concessions made now might be given back later.