How much does a startup in India pay for legal fees?
This article was first published in 2014. Since then, I have seen at least 10 more funding related transactions and the numbers more or less are still valid.
TL:DR: For funding events (Pre-seed, Seed, Series A/B), it ranges between 0.8%–1.5% of the round.
Someone asked a question around what are legal expenses like when one deals with the startup friendly lawyers in India.
Having some knowledge about this, I decided to lay out the different kinds of services and their indicative prices. As well as some of my thoughts on the topic.
Standard Agreements NOT related to fundraising:
These agreements includes documents like Employee/Founder contracts, NDAs, Supplier/Vendor contracts etc. One can end up shelling anywhere between 30–60K INR for these. Typically there are two cases here:
– Review (this is where you supply a document, and ask the firm to give their comments, make changes). The fees I quoted, typically allow for up to 2 reviews.
– Drafting (this is where you ask the lawyer to make the document from scratch)
Now typically these documents are supposed to be straight forward, but there can be cases where there negotiation required (e.g contracts with large companies for say, distribution partnerships). You will be charged extra for these negotiations (again depends but could be anything like INR 4K-5K/Hr, if not more)
Sometime startups want constant legal help. Someone you can call at a minutes notice, or bombard with mails as and when you have queries. Remember what the Morpheus Gang entrepreneurs were always harping about, back in 2010? Now imagine that with legal. Cases where one can see this:
– Med tech, where there are regulations
– IP related or data based startups, who make use of third party data
– API related cases
Retainers can either be a monthly fixed cost (INR 15–50K/Month), while going to a startup-friendly, 1–2 Lawyer shops. Retainers can also be on an hourly basis (INR 3–5K/Hour).
The good startup friendly firms are often overloaded with work (due to lower costs) and so one needs to plan in advance. Most lawyers are definitely not “just a phone call away” at 3 AM in the morning.
Definitive Documents (Transaction related documents like Shareholder’s Agreement)
In investment related documents, typically, the draft comes from the investor. And the startups counsel is involved mainly in review and negotiation. In the cases of seed rounds, often unless the round is being led by an institutional investor, startups and investors together appoint a lawyer (think angel syndicates etc). Or, the investors appoint a lawyer and the startup doesn’t.
This can sometimes happen because inexperienced founders might not realize its importance at this stage, or that paying double in legal fees (remember both the investors and startup’s fees comes from the money the start up is raising) might not make sense to the startup.
– For seed rounds, 70K-80K INR (for the startup), if one goes for startup friendly small shops. It can go into couple of lakhs if there are negotiations involved and complex structuring involved.
– For Series A, B anywhere between 5L-20L
For the benefit of the people here I am throwing a few “real” numbers here (having witnessed/been part of at least 10 transactions).
As you can see, these three transactions cover the gamut of small Series A, angel and seed/incubator rounds. These cases collectively involve a total of 5 legal firms, of which 1 was a premier firm (which was involved in only negotiations, no drafting).
In any model, the most important things are the assumptions and the fixed numbers.
The first call with the lawyer establishes the fixed number: viz the deal value. It appears to me that once this is established, all the future numbers and assumptions (per hour fees, number of hours etc) are volatile.
- If we give them an indication of the number of hours, their hourly fees changes accordingly.
- If the fee is kept fixed, their consumables/extras are added in the quotation. And their hourly fees drastically changes (which they charge in case we go above the fixed number of hours)
Which is well, the way legal firms work, unless there is a possibility of retainers or recurring business.
There is no “TheFunded” for legal firms (most of the firms don’t even have a proper website). And while each case might be complex in their case, most of the time, the basic deal documentations (or atleast a large chunk of them) aren’t that different really and are boiler plate.
What I mean is, if an agreement is truly standardized as many investors like to claim for early stage deals, in principle they (and the startup) wouldn’t need lawyers except for negotiations.
We have in the last few years seen consumer retail, webservices (Saas) even real estate and early stage VC being disrupted with access to information. Legal (and consulting) are the two fields, which are still shrouded in mystery, because the offering isn’t clear at the beginning of the engagement. Even when the offering is clear, the keepers of the knowledge are the lawyers and their authority commands a premium that they choose to charge. The downside is most often borne by the startup.
Some things that start-ups can do:
- Capping legal fees with investors
- Choosing tiered pricing with law firm (mix of fixed + variable)
- Speak to other entrepreneurs, and unless the scope is particularly complex, maybe get access 1st draft of documentation from somewhere (Mukund has a good list on his site)
- Stop just hanging out with other entrepreneurs, make some lawyers friends! This applies to CA/CS etc as well. They are very much part of the ecosystem even if they aren’t that visible in the general startup discourse.
But I don’t want this to sound like a rant. I will say that in some cases, you really do need a decent lawyer and paying premiums in those cases is fully justified. These are cases where you have disputes or negotiations or issues related to IP, or if you have too many investors and you want to structure the agreements so that there aren’t any complications later, or if you’re raising funds (typically large Series A or Series B onwards) from a marquee investor who brings their 500$/Hour counsel with them.
DO NOT TRY TO TAKE A CHANCE HERE. Paying a little extra to lawyers here but getting the best in the field, is totally worth it.