What to Expect From Legal
Hey, this is Jason – welcome to another week of INTRO to Finance. If our post about accounting wasn’t exciting enough, we’d like to get your blood pumping with a post about lawyers for this week’s question:
“What should I expect from the legal process in non-dilutive financing?”
We’ve talked about the cost of capital paid to the financier in previous posts. However, there are other costs to keep an eye on – namely the legal bill. If you don’t manage the process well, you might find surprise fees at the end.
The good news is that non-dilutive financing is typically easier to complete than an equity fundraise. The legal process should require a smaller amount of your time and cost to finalize.
Cost Expectations
As with any lawyer, you want to keep their involvement limited if you’re going to save on costs. The simple nature of most debt agreements should not end in a large legal bill.
In most cases, you should finalize a debt deal under $10k in legal fees. The smaller deals under $50k might be simple enough to negotiate yourself or with very little legal involvement. You shouldn’t be paying much more than $2k to complete a deal of this size.
Larger deals can become much more complicated; however, I haven’t seen many deals exceed $20k in legal fees for even $5M in debt. If yours does, something went wrong – your lawyer was too involved or expensive, or the financing arrangement had some complexities.
If you aren’t overly relying on your lawyer to get the deal done, the cost should stay low. This doesn’t mean you don’t use your lawyer. They’re there to protect you and make sure your company isn’t signing something unfavorable. However, most agreements shouldn’t require heavy time and cost involvement from your lawyer.
Time Expectations
In most cases, the diligence process is the longest time investment you have to make. If you’ve made it this far, you should have an agreed-upon deal and are only finalizing the documentation. The legal process itself should be relatively quick.
Most debt deals should only take a couple weeks to finalize. With smaller deals, it could be as short as a couple days.
Of course, the right lawyer will ensure the process is quick by focusing their time (and your money) on items that matter to your business. Find a lawyer who understands debt and other non-dilutive financing options.
Your best bet is to use a firm that’s known for working with startups on VC deals and has offices in larger cities. If they understand VC deals, they likely have someone who focuses on alternative funding options. Having offices in larger cities typically means they work with a larger number of companies and have seen enough deals to understand them well.
The experience your lawyer has with these types of deals will translate to a faster and easier legal process for you and your financial partner.
Final Expectations
Some lenders require you to pay for their legal bills. Ask before starting the legal process. If you pay for their fees, be extra cautious about how they interact with their lawyer. Establish a reasonable cap for legal fees using our Cost Expectation guidelines above.
As you can see, the process shouldn’t be so expensive or lengthy that you’d want to avoid getting the deal done. It should be an easy, smooth end to the financing process and the great beginning of a new financial partnership.
INTRO to Finance — every Thursday. From us to you.
