I've been a VC for about 5 years and tbh I don't know why this industry standard exists. It's not something that makes sense to me. I think it would be a good change for the industry to get rid of this practice, and I think the change should come from the top (e.g. the National VC Association or from a group of leading VCs).
Similarly, why do sellers pay closing costs for houses? Makes zero sense. The money is flowing from the buyer to the seller. It also inflates the price of the house since the buyer has to pay the seller to pay the closing costs. Then you have to pay mortgage interest and property tax on that inflated value.
I paid closing costs when I bought, and as my realtor said, it's like free cable. It's not a massive savings but it's free cable every month.
Having the seller pay closing costs essentially allows the buyer (the buyer always pays transaction costs from an economic perspective) to pay the closing costs through the mortgage. I.e. the house costs 10% more, but you can mortgage it, instead of an extra 10% out of pocket.
The rationale, from the VC's perspective for the company paying for a priced transaction is the same. Really this is a way of making the LPs of the fund pay for the transaction (i.e. their money given to the company to pay the transaction) rather than the VC having to pay transaction expenses out of their fees.
Usually valuations are determined more by the investors rather than the founder. That might sound unfair, but investors have much better market comps. (Kind of like how you might think your house should be worth $X, but a real estate agent will tell you it's worth $Y, and their guess is usually better than yours.) If there are lots of investors vying to get into a round, then the founder has a lot more pricing power.
Market terms for a seed round are either 1) a priced round, or 2) a SAFE or note with a cap and a discount. 20% is a typical discount. A typical cap, in Silicon Valley, would be $4m-$5m on the lower end (idea or prototype phase, little or no market validation) up to $8m-$10m on the higher end (product is live in the market, has decent usage, and perhaps $25k-$75k MRR if you're b2b). There are also outliers that are >$10m cap -- usually those companies have exceptionally strong growth or founders.
In practice, SAFE/note discounts don't come into play that often but caps do. That is, next rounds are usually significantly higher than the cap (and the discount doesn't apply).
