Term Sheets: What are Investor Counsel Expenses?

This week we continue our series on key VC financing deal terms.

This week’s question: What should I know about paying for investor expenses in a VC financing?

Our answer: In a VC financing it is standard practice for a startup to cover the lead investor’s legal fees, which are incurred by the investor’s attorneys in negotiating, reviewing and marking up financing documents. Sometimes this cost coverage may also extend to other expenses such as specialized diligence, tax or regulatory analysis, background checks on the founders, etc. Such expenses are typically subject to a cap; often starting between $30,000 and $40,000 in early-stage price rounds such as a Series Seed or Series A; however, for more complex or later-stage deals, that cap may go significantly higher. We recommend that, at a minimum, the term sheet sets a clear and all-inclusive fee cap, requires prior company approval for covering any overages, and stipulates that fees are only payable at closing (and not at all if the investor backs out without cause).

Key Considerations

While investor expenses may seem like a minor detail, they often constitute a significant portion of your startup’s financing costs and become a point of tension if not clearly defined upfront.

1. Know and Include All Fees in the Cap. Be clear about what types of fees are included in the cap – don’t just assume – by aligning with the investors early so there are no surprises down the line. Sometimes the cap only applies to legal fees, but you should make sure that there is a clear and reasonable cap set that covers all investor expenses, including administrative costs, and anything beyond that cap should require prior company approval.

2. Pay Only At Closing. Investor fees should be deducted from the investment at closing, not paid in advance. We also recommend including a carveout that if the deal falls through due to the investor backing out without cause, the company shouldn’t be on the hook for those expenses.

3. Require Approval for Increases. Fee caps should not be treated as soft estimates, so any increase should require express approval from the company. It’s reasonable for things to shift during a deal, but changes should be discussed and not assumed.

Why It Matters

Covering investor fees is standard practice, but it doesn’t mean it’s a blank check. A clear, capped agreement helps protect your runway, minimize surprises, and maintain a collaborative dynamic with your investor; it may also give your investors confidence that you are mindful of your startup’s expenses. Address it early, define what’s included, and keep control of the cap; this is your startup’s money, so make sure that every dollar counts.