Fee Fees

       Setting up a company can be pretty simple.   Many small startups use storebought forms or software to set up their LLC or S Corporation.  If you are looking for investment down the road, it will pay off to get a lawyer to make sure all the agreements are properly done and the founders are protected.   Some lawyers will do this for a flat, low fee. (When you do this, make sure you spare some stock for your family, now while the stock is virtually worthless).

       But your first round of investment is another thing entirely.  You absolutely need a lawyer to guide you through and look toward later investment.    There is a lot of debate about how much this should cost.

       Fred Wilson, a venture capitalist at Union Square Ventures, blogged this spring about a small seed financing he did, in which the attorneys’ fees came out to $17,000.  This was for a financing in which all the parties basically agreed on the terms and knew and trusted each other.  The costs taken up by the attorneys amounted to a large drain on the startup capital for the company.  So why, he asked, can’t such a thing be done for less than $5,000?

       For large law firms, keeping the bill at $5,000 is a nearly impossible proposition.  At Foley Hoag, Dave Broadwin tried it out, restricted by comments made on Twitter within 140 characters.  Even then, he hints that his bills exceeded five grand.  Broadwin argues that smaller firms also cannot keep their bills that low and still make a profit – and it is a losing proposition as a loss leader. 

       Firms like Perry, Krumsiek & Jack LLP  are able to offer rates as low as that because they are not restricted in how they bill.  By offering flat rates or other billing methods, lawyers no longer have to keep track of their hours.  That frees up a great deal of time, all of which can be devoted to working for the client.

       But a new SEC rule proposed to implement the Dodd-Frank Act may make even simple financings more complicated and expensive.   

       Financings made under Rule 506 (used for almost all private placements, such as angel and seed financings), bars Rule 506 from anyone who associated with the issuer or offering who has engaged in any of a number of “bad acts” set out in the rule.  These bad acts include misdeeds such as securities-related criminal convictions, prohibitions, injunctions or court orders, discliplinary measures, suspensions or stop orders.  Without Rule 506, the securities need to be registered and th issuer and its associates are held strictly liable if they assert Rule 506 and cannot qualify.

       This means that the issuer will have to show it has made reasonable care to determine that the people covered in the rule have not performed any of the “bad acts.”  This diligence will raise fees and require more time.

       Ironically, this rule came three months after the SEC announced it is reviewing the rules under which privately held companies raise capital and are subject to securities regulation. SEC Chair Mary Schapiro stated that:

The staff is taking a fresh look at our rules to develop ideas for the Commission about ways to reduce the regulatory burdens on small business capital formation