> One founder wanted to negotiate out of having to pay $10K in lawyer fees.
Are these fees for the VC's due diligence investigation, or are they for putting together good paperwork for the company? For the former, the company has just bartered legal services and needs to issue an IRS form 1099 to the VC who has to pay taxes, and may be committing securities fraud by colluding to book the fees as basis cost rather than operating expense.
Neither. The proper way to book merger-and-acquisition-related legal fees (along with other non-recurring professional fees related to the transaction) is as part of the basis cost of aquiring the stock. This increased basis cost is not reflected on the seller's side as increased purchase price.
Indeed, this is how legal fees related to the acquisition of any capital asset would be booked by a company. It's all part of the wonder and horror that is the modern tax code.
Because recording an increased basis price means that they need to sell the stock for a higher amount to realize a gain (i.e., a profit).
Individual VCs (i.e., angels) would prefer that, b/c it means lower taxable income. However, VC firms prefer the appearance of profitability, so every cost they don't have to take on themselves makes their fund look better.
Are these fees for the VC's due diligence investigation, or are they for putting together good paperwork for the company? For the former, the company has just bartered legal services and needs to issue an IRS form 1099 to the VC who has to pay taxes, and may be committing securities fraud by colluding to book the fees as basis cost rather than operating expense.
Anybody know?