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The VCs aren't the investors here. There are 3 parties, the startup, the VCs and the LPs. The LPs are generally pension funds, college endowments, and sovereign wealth funds, i.e. institutions who can write $10M-$100M checks. The VCs are their agent, like a real estate agent helping you buying a house. While VCs put their own money into the fund, generally the vast majority of the fund money comes from the LPs. The VCs get paid 2 and 20, 2% of the fund per year for things like salary and rent, and the first 20% of profits from the fund when it ends, in 10 years. Because of this structure, they don't get to treat the fund money as their own personal piggybank. No matter who pays, the cost of a deal is going to be <money startup receives> + <startup legal costs> + <VC legal costs>. Raising the cost for the VCs, without changing 2 and 20 just results in increased costs for the VC. Paying their own legal costs means they'll do fewer deals, with larger check sizes. |
if it paid its own legal fees it would get that much less equity.
imagine I said "I'll invest 1M at a 2M valuation but you have to burn 800K of it in a bonfire." vs if I said "I'll invest 200K at 2M valuation but I'll celebrate by burning 800K in a bonfire."
The same thing happens to the money (it burns in a bonfire / goes to the lawyers) but in the first one I have 50% of your company and in the second one I have 10% of it.
Because in the first one I added it to the equity investment before making you pay it.