Guest post: The madness stops here – don’t pay a VC any fees

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This is a guest post written by a London-based VC. For the purposes of them being able to speak plainly without jeopardising their fund or their career, I’ve allowed them to post anonymously. Why are we doing this? Well, while the startup eco-system is long in the tooth and highly developed in the US, the European scene is still a spotty, shy teenager, sometimes making a few mistakes. And as a result startups need educating. Make no mistake, LondonVC is a genuine VC and TechCrunch Europe has met them face to face. Over the next few weeks they are going to offer a unique insight into the VC and startup world in Europe. I hope it’s enlightening for European startups. Read and learn.

One reason I started this column is because I see a lot of “injustices” in the VC-start-up universe, and while I’m obviously aware that we don’t work in the charity sector and that business is business — and we’re here to maximise investment returns! — I do think we should let market forces determine what’s reasonable or not for business practices and deal terms. However, this works only if entrepreneurs actually have access to experience and insight into what really has been “standard” or acceptable in the past.

Unfortunately, a lot of things that I witness as an active member of this scene take place because entrepreneurs let them – simply because they don’t know any better. And how could they? It’s not like a VC is motivated to let them in on it… And since not many entrepreneurs brag or complain about the terms they get from VC term sheets, I realise that it’s difficult to know what’s standard or not. I’d like to be one small source of “truth”, and hopefully over time we can bring a bit of balance back into this business. First up: For early stage companies and start-ups: Don’t pay your VCs any fees.

This means:

Do not pay your VC a transaction or arrangement fee [for doing the deal]: They should pay for their own costs of doing business.

Do not pay your VC’s legal fees: If you absolutely have to, cap it so it doesn’t become unwieldy.

Do not pay your VC any non-executive directors’, advisory or consultancy fees for serving on your board or giving you advice:

Unless you’re bringing in strong revenues and turning a profit, this is just plain daylight robbery.

Aside from the fact that it just doesn’t make sense to put money into a business only to take it back out again (like, WTF?!), these fees will also be distasteful to other prospective co-investors who might otherwise take an interest in your financing round. In other words, no investor happily tags along on a deal if the lead investor is lining their own pockets with the cash.

For an early stage pre-profitable company, it doesn’t make sense to pay fees. You should choose your VC investors for the value they bring (over and beyond a bank or other sources of “dumb financing”), so it doesn’t make sense to pay “extra” for that value.

Ask The VC has a great Q&A post on this from July 2008. (And by the way, Ask The VC should be a must-read for any entrepreneur, but I’m realising that it doesn’t get as much of an audience here in the UK/Europe.) Paying fees to your VCs is clearly a distasteful practise in the US, so why is it still popping up in term sheets circulating around London? Can we please not be the “seedy side of VC”-?

One reason I guess these are cropping up more and more is because of the rise of new smaller VC funds. There’s been a lot of public discussion over the past 6 months or year that the VC industry is “broken” from VCs living (fatly) off their fixed non-performance based management fees and being subsequently incented to simply raise larger and larger funds. Some examples of this discussion and ranting is here, here, here, here and here plus a nice aggregated listing here (handy!)

Obviously this is a simplified view – since a VC can’t possibly raise a new fund (of any size) unless it has a track record or performance to boast of. But either way, there has been a clear response to all of this fodder and we’re seeing new smaller funds emerge on the scene. And while that’s very good news, the bad news is that *some of* these smaller funds (not all, of course) – in compensating for their smaller management fees (or none at all if they are private funds) – are nickel and diming their portfolio companies instead.

I say let’s not replace one inefficient model with another.

  • Charly Omer

    great post, I’m looking forward to read this column.

  • Gabriel Aldamiz-echevarria

    Agree, I still don’t understand how some VCs ask the entrepreneur to pay for fees.

    But Mike, I totally disagree with this post being anonymous, if you don’t put a face to an opinion, the opinion loses value. If this VC wants to foster debate or change things, s/he shouldn’t hide.

    • Nigel Ainscoe

      Normally I am unhappy with anonymity on the Web but in this case I think it should be viewed more in line with a respectable, responsible journalist protecting his sources. And I am looking forward to seeing this story unfold. I certainly think it can only be a good thing if the VC industry is encouraged to maintain the highest standards.

      • Elliot

        re: anonymity, if there is pressure on the source, this would create a sort of conflict of interest for the source that might hinder openness. It’s really sick how it seems these days that 99% of what all CEOs and spokespeople say has been contrived by a committee. In such an environment, the only honest and open executive might well be an anonymous one…

    • rsforster

      Unfortunately in the UK it seems pretty standard to pay the VC’s legal fees although I don’t agree with it or see the need for it.

      If the writer doesn’t want to embarrass anyone I’m guessing they are not a senior partner and are doing this without their firm’s permission. Fred Wilson and Brad Feld who write the best VC blogs imo don’t have to worry about offending more senior people in their firms’ and are highly regarded by their peers.

    • Gebadia Smith

      Do you own a blender? If so stick your head in it… your comment essentially is assuming TC is tabloid material.. cause you know TC allows guest posts from just anyone.. my mom, emailed Mike and sure enough she got to do a post on writing code for google even though she can barely use email.

      TC isn’t going to publish some idiot.. although they allow you to comment… and the reasons are obvious.. the guy doesn’t want to lose his job.. considering people are getting fired for tweeting, blogging or saying anything against the grain cause we live in a corporate censored internet world… it makes sense..

      Or would you rather not hear the truth.. just watered down articles from people who are willing to go on record.. curious did you write all those newspapers that don’t reveal their sources?

      Blender.. head…

  • Another London VC Guy

    All fine and good doing this anonymously (as am I, because I don’t want to embarrass anyone), but in practice there’s honour among thieves. No top tier VC firm will try to pull management or deal fees on an entrepreneur, but all of them I know of will (rightly) expect to charge their legal fees out of the funds being invested — if the deal proceeds.

    Just the same way a bank or other debt-vendor would.

    Then there’s usually a negotiation about whether those legal fees can be claimed against the company if the deal falls through. That’s where you should focus your bullets, if the cash cost of the deal really bothers you. In practice the cash cost of the deal if you have a decent slug of money coming in is usually pretty irrelevant in the scheme of things. No good firm tries to make money here; they’re focused on the big money big win.

    The best way to prevent being screwed over by an investor is to have multiple competing term sheets.

    The best way to have multiple competing term sheets is to have a great company, and run a tight fundraising process. Yeah, I know, easier said than done.

    If you do get a term sheet and haven’t a clue what you should and shouldn’t be negotiating about (and be careful here, because some of the stuff in there really isn’t negotiable, no matter how hard you try, or what you read on the Internet), then get a lawyer who has done venture fundraising 10 times before. There are about 6 of those guys in London. Find one. They’re not hard to locate — a few of them go to most of the events. Don’t use a third party advisor unless you have to – it makes you look like you can’t raise money on your own. (Sorry, guys, but you know it’s true.)

  • Jasper Westaway

    From my experience:

    – No VC has ever requested fees from me.

    – They do ask you to pay your legal fees, but the problem is really a different one: Contracts should be standard for startups (you can get templates from the BVCA) and therefore legal costs should be cursory.

    – Directors fees are annoying and counter-intuitive but pretty marginal in my experience. The real issue: make sure you have a great investment director, then you will feel that you are getting value for money.

    • Another London VC Guy

      Jasper, with respect, if you think legal costs should be cursory, you’ve never run a fundraising process. There’s a fair bit of work for the lawyers to do (due diligence, managing the process, handling employment docs, EMI schemes in the UK, etc.), even if the deal docs themselves aren’t heavily negotiated — which they usually are.

      For a Series A round, a reasonable central band range for investors’ legal costs is £25k-£50k depending on complexity of the deal and size of the round.

      • Jasper Westaway

        Horseshit. The issue is cultural. VC’s and lawyers can’t stop themselves fiddling with the details. Even if you take the VC out of the equation, the lawyers can’t stop themselves even when neither side is negotiating.

      • Another London VC Guy

        Call it what you want, in my experience you’re wrong: good lawyers cost money, even well-intentioned, well-managed ones. That’s because there is _always_ complexity. Always. Even in the simplest of simple deals.

        Plus most good lawyers don’t even make much money on the transaction fees: it’s an investment on their part for more lucrative work in fund management and administration, or supporting the portfolio companies as they scale.

        And 25k on a 2.5m investment is pretty reasonable as costs go for a ‘bespoke’ transaction.

      • Nicolas Boullosa

        “For a Series A round, a reasonable central band range for investors’ legal costs is £25k-£50k depending on complexity of the deal and size of the round.”

        That should tell something to any entrepreneur who respects frugality and indepenence. Personally, I’d stay away from such deals.

        Today, the option of keeping costs low while doing really serious stuff in the Internet is 100% viable (cloud computing, crowdsourcing, etc.) These days, no need to buy servers nor use middlemen if one doesn’t want to go that way.

        Something that just creates a £25k-£50k “fee” just for “paperwork” (do you actually print it in nice paper, at least) should really smell badly to any entrepreneur willing to succeed.

      • Jasper Westaway

        Yup, eat your own dog food. They like low cost startups but don’t want to follow the same model.

      • Another London VC Guy

        What are you trying to achieve: build a great business, or change the legal profession?

        If the former, then pick your battles. It’s brain dead to fight over a 1% transaction fee, when best case scenario you can push it down to 0.5%.

        Seriously, save your bullets and your stress levels for the stuff that actually matters on a termsheet: participation, liq pref, control rights, reverse vesting, etc.

      • Another London VC Guy

        No, of course they don’t follow the same model: it’s a different industry.

        Successful entrepreneurs make 10x what successful investors make.

      • Jasper Westaway

        I think it’s you that persued this thread; my original comment was no more than an aside.

        You’ve also assumed I was discussing Series A profile – I was talking about Seed.

        Unfortunately the contract looks the same for seed as it does for Series A, but the amounts are smaller. This is the cultural issue: treating early stage companies as bespoke and building in bespoke cost.

      • Another London VC Guy

        Best arrangement I’ve seen for seed investments is for both parties to share the same lawyer. And amounts involved should be much lower.

        But not sure why seed rounds are so relevant in this context: most VCs don’t even do seed investments.

      • http://@davidsmuts david smuts

        Another London VC- Your absolutely right about the charges £25k-50k Lawyers take- yes, this is market rate and YES there is some rationale for this.

        The problem or the objection shall i say for many Enterpreneurs is that the these fees are too much. The reason being:

        VCs are experts- by and large they know these contracts in and out- they drafted the term sheet under review any way so they’re legal expenses on the term sheet side/contract should be minimal.

        VCs are also experts OR SHOULD BE at conducting due diligence on the firms they are investing in- As they have a portfolio of similar companies and have numerous professional contacts and their partners are all investment experts then they should have the necessary skillsets to conduct due diligence at a minumim cost.

        OK, I agree for very complex Series A rounds a £25k-50k fee may me apt. But let’s be honest, for a funding £1-2M on a start up Series A this should not be the case? Why is it in the US the fees are $25-50K (almost 50% less than UK)?

    • valto

      “Unfortunately, a lot of things that I witness as an active member of this scene take place because entrepreneurs let them – simply because they don’t know any better. And how could they? It’s not like a VC is motivated to let them in on it… And since not many entrepreneurs brag or complain about the terms they get from VC term sheets, I realise that it’s difficult to know what’s standard or not. I’d like to be one small source of “truth”, and hopefully over time we can bring a bit of balance back into this business”

      These are exactly the reasons we started the initiative. And we have simple 3 item action list (that does translate to plenty of work).

      1. create categorizing model to identify different types of start-ups
      2. find/build/attach high level sets of terms for different categories
      3. develop efficient web tool to better manage the logistics and communication of the agreeing process (start with high level term sets by category with “blog style” commenting per each term)

  • Danny Robinson

    Originally from the valley, and now live the west coast of Canada, I’m an active angel, advisor and manage a startup VC fund and accelerator. I have never seen or heard of any VC ever charging their portfolio companies. However, I have found it very common for the company to pay their legal fees associated with the closing.

    But this is a great warning to first time entrepreneurs, just in case they come across anyone that does this.

  • RoryB

    In such a competitive market for both funding and deals I would have thought that the rise of the VC fund with minimal or no management fees would be on the cards. Partners live the startup entrepreneur lifestyle and the payout comes if the fund really delivers

  • Marc

    Yea Gabriel, great idea. Hey why don’t you write an article for techcrunch about how the company you work for is completely ripping off inexperienced clients and why that should stop and let’s see if you have a job tomorrow.

  • roofing insulation

    Great article but I would love to know who you are ?..

  • Rob Wilmot

    On the whole, and with only a few exceptions, VCs in the UK are not naturally entrepreneurial. And your article reinforces this. The majority of VCs are like mortgage lenders where the normal practice is to pick the just risky enough – but not too risky investment opportunities – and charge an ‘arrangement’ fee and legal costs which they stick on the balance of the mortgage money they lend! This is paralleled by VCs re-charging costs and fees to the entrepreneur that the entrepreneur pays for by a premium of the percentage stake taken by the VCs. However, I have to say that entrepreneurs take some of the blame for rolling over on this (by not being very entrepreneurial.)

    In summary VCs in the UK take less and less risky investments and charge more and more to entrepreneurs with the net result that some of the more innovative investment opportunities – more risky and where entrepreneurs with bigger balls say no to VC shenanigans – don’t get invested in and therefore don’t get the traction they need to succeed. Hence when was the last time you saw a Facebook or Twitter equivalent come out of the UK?

    • http://@davidsmuts david smuts

      Rob hit the nail on the head. UK VCs just dont get it- they’re not innovative or entrepreneurial (with the exception of a select few).

      Where are the UK’s Brad Feld, Fred Wilson, Mark Suster etc.., we don’t have any. Only one out there blogging is Nic Brisbourne too his credit, and let’s support him for that.

      Time for UK VCs to step up! Come on Another London VC and London VC, reveal yourselves and speak up- you can help level the playing field and lead by example- we know you want to!

      You can’t change or lead a group without provoking a few people here and there

      • Rob Wilmot

        I have Nick Brisbourne’s blog in my RSS feed. And though I don’t agree with everything he writes, his posts are thought provoking and insightful and an great temperature gauge for what the VC community is (or should be) thinking about in the UK and beyond. I’ve had the pleasure of working with Simon Cook – also from Nic’s firm – in the past. Great guys.

  • Simon Kapenda

    Thank you for the post.

    Keep the author anonymous “for now”, and let other VC weight in the discussion.

  • BJ
  • me

    Great post. Thanks.

  • US VC Guy

    fees are just one of the areas where VC tilt the economics beneath the headline that get too much attention (dilution, governance).

    Legal fees are standard and no experienced vc worth anything will deny you a cap.

    to be honest, not sure why this guy is being anonymous. my firm headlines against fees and we get more respect out of the community for doing so. if he feels strongly, he should do the same.

    • http://@davidsmuts david smuts

      Hi US VC Guy- aren’t you doing the same? that is, posting anonymously.

      UK VCs look to the US for leadership, so do start-ups which is why so many (too many) ditch London for Silicon Valley.

      Help us to help the UK VC industry by lifting the veil on your identity please. Don’t be shy- you can help too

  • will

    i absolutely agree, we are a tiny bootstrapping company looking for investment and all of the local VC firms are government sponsored ones and all of them talk about arrangement fees. I just dont get it, arent they supposed to be getting a return on their investment from an exit, rather than a few percent here or there?

    its the same with business angel networks, they all charge things like £150 to pitch to potential angels. if you’ve only got a few thousand pounds to run your company, and their are 20 business angel networks you might need to pitch to, to raise finance, its a huge risk to blow a huge wodge of cash just to talk to potential angels.

    surely there has to be a better model, VCs should obviously just plan on an exit and why cant business angel networks be funded by the business angels themselves, they are the ones with the money to invest, they are the ones who want to invest, why do they want to make it harder for people to pitch to them? just read an executive summary, if its any good arrange a meeting, if it isnt say sorry.

    we will never compete with silicon valley until we have a real risk finance culture, rather than one that pretends to do risk finance.

    • david smuts

      Our problem in the UK is we lack a sophisticated Angel investor base to fund at seed level. We have too few in that field. The UK Government has funded VCs to gap fill here but these seed funds are POORLY managed- (read the NESTA reports).

      The UK will never compete with Silicon Valley until we:
      1) Build up a professional Angel Investor Base
      2) Replace the “Old Farts” in the VC firms who are preventing some potentially successful Younger Associates/Partners from investing outside the comfort zone of the Old Farts- UK VC guys: “you know exactly what I’m talking about”

      • Valto

        I strongly believe that next angel network needs to be build to internet IE. facebook of startup funding. After all most of the startup businesses aim (or should be aimin) to global markets. And no it dont mean there should not be local ones – there do, but these can all be in one layer.

  • LondonVC

    @david smuts: re: “You can’t change or lead a group without provoking a few people here and there” — I could not agree more and that’s why I’m addressing a wider audience. In day to day dealings, I’m just as candid with entrepreneurs and co-investors about what we’ll agree to and what we won’t. And I’ll keep on doing that, but hoping this column will elevate the level of awareness.

    @All: Thanks for all of the comments and this lively discussion. It’s just what I was hoping for.

    Posting anonymously allows me to get the word out but also stay in the thick of it and be witness to what happens. Unfortunately the UK market is still too small and incestuous right now for me to call people/firms out or to risk getting cut out of deals. I need to see the flow in order to affect it. If I embarrass people (by revealing my name/firm which will effectively reveal what other firms and deals I’m talking about), I’ll stop getting deals and referrals from co-investors and won’t be able to tell you what’s cool and what’s not.

    • david smuts

      LondonVC- well explained.., completely understand the need for anonymity in the UK.

      Message to any US VC guys: Help London VC guys out by speaking up- 5 very BIG NAMES in US VC have been in London this month- Why? Because they see opportunities here that UK VCs aren’t following through on- no need to mention names.

      There are LPs out there in London town who are now getting a bit fed up with the UK VC performance. If you’re a VC who wants to change the world you may need to consider breaking out on your own. There are LPs looking for a different investment approach. If you’re holding out for your home-run I understsand, but just don’t wait too long or you might miss the boat.

      Successful VCs are Entrepreneurs in their own right. They are NOT careerists.

      My best wishes to LondonVC and AnotherLondonVCGuy, I appreciate the position you find yourselves in. You’re doing your bit to help foster change, albeit behind the public veil for now- we understand!

  • Alex

    Good post.

    @ david smuts
    excellent reply to US vc tough guy hiding behind a veil.

  • Max

    Anonymous VC,

    Post as yourself disagreeing with yourself then nobody will think it is you.

    Yes, I am a genius.

    Shout out to Moss on the “IT Crowd”

  • Warrick

    Unfortunately the London (and European VC) scene is not as well developed or competitive as it is here in the US. While a ‘hot’ deal on the W. Coast will have numerous VC’s circling, putting the entrepreneur in the drivers seat, the equivalent deal in the UK will attract only a few firms. As a consequence a deal that may not be ‘hot’ but certainly fundable will at best get 2 term sheets to work with, and the terms that @LondonVC mentions are pretty ‘standard’ – abhorrent though they may be. If you are a UK-based entrepreneur with 2 term sheets and both VC’s are telling you that fees for non-execs, payment of their (uncapped) legal fees, etc. are the norm – who are you to argue!?

    • Geert Peeters

      great insides! Actually, european – this issue is unfortunately not limited to UK VCs – are sitting Ducks for almost any West Coast or Wall Street VC. as long as European VCs look at funding start-ups as risk funding (for German VCs this is actually called “Risiko Kapital”) and not as Venture Capital, their always behind their US Peers, ALWAYS!

      So for you guys abroad, let´s come over and roll-up a great and evolving market.

      And anyone looking for an oppertunity, do not hesitate to contact me ;-) free of charge of course.

  • fred wilson

    I agree that expecting to be paid a fee by a portfolio company is not appropriate practice. i don’t see it at all in the US.

    paying the legal fees of a VC is a different story. it’s a transaction cost and should be paid out of the proceeds of the transaction.

    that said, it should be capped and the cap should be negotiated by the entrepreneur.

    • david smuts

      In complete agreement here, legal fees should be capped (as mutually agreed) and are part of the transaction costs. The question is: why are these transactional legal fees in the US, about half of what they are here in the UK (is this because we aren’t capping)?

      I was going to make reference to, and lament the fact that the BVCA publishes a “Model” term sheet without any reference for a cap on the legal fees. However on checking the site before I posted this I see the model docs have now been removed (this is very recent). I presume the BVCA is now looking at drafting a newer set of model docs? (I applaud this if they are).

      This is an opportune time to be bringing together Entrepreneurs, Angels, VCs and Lawyers to collaborate on this. Our economic needs, neccessitate a collaborate approach to innovation and economic stimuli. We need to be engaging one another on this, not necessarily on an open forum but certainly in a manner in which there is “open dialogue and engagement” on the issues.

      Thank you Fred for your participation in this dialogue- we need more of it!

      • CE

        Fred covered all of this about a month ago (and there are comments re: European issues). See:

      • Brian Dorricott


        In my experience of meeting new potential angels in the UK, there is a pool of people who’d like to invest in start-ups but don’t know where to start… What is a reasonable way of operating? Should you charge fees? What are the risks? While there is a lot of help for entrepreneurs there is little for angels (even if they are prepared to pay) which seems to lead to poor investment decisions being made and the loss of good potential angels from the pool. I’d like to see some form of “boot strapping” for business angels who (from my experience) are the people who make things happen for the small guys.


      • Valto

        Here’s one good online source to follow

      • coslaw


        The BVCA Model Documents are still up on the website but are very well hidden ( Unfortunately, the Model Documents do not suggest a cap on fees.

        I think the difference between US and UK fees is not so much an issue of capping and more to do with the relative immaturity of the market here. There are relatively few law firms in the UK (and Europe for that matter) who do venture capital investments week in week out. The process is far more negotiated and protracted (and expensive) as a result. In the US, most of the law firms are very familiar with each others’ documentation and the practices of individual VCs and so the process is more streamlined as a result.

        Whilst it pains me to say it (as a UK lawyer), fees in the UK for venture capital investments should not be as high as they are. Both VCs and entrepreneurs should insist that their lawyers use a standard form. My firm (Orrick) would always suggest using the BVCA Model Documents as a basis for any investment. Although they are very investor biased, they do at least provide a market standard from which all the parties can work from.

      • david smuts

        Thanks for locating the hidden BVCA model docs Coslaw.

        I am encouraged to hear such a leading UK (international) law firm as Orrick state that UK fees are too high- your suggestion that this is likely due to lack of maturity in our market goes some way in explaining this gap as well does the explanation about US law firms being familiar with the VC firms’ structuring and the volume of work. So I can see some logic in explaining this fee gap.

        All of which for me, necessitates the need for increasing collaboration amongst lawyers, VCs, Angels, Entrepreneurs etc.., I do lament though, that we should be utilising the BVCA model term sheet as a basis for contract drafting given its heavy weighting in favour of the investors. We need to start from scratch and jointly work together to publish a model term sheet in the spirit of collaboration. Just look at the model docs on Y combinator of the NVCA or TechStars. These docs are about half the verbiage of our BVCA doc. Surely that’s a cost saving straight up!

        Then look at what Wilson & Sonsini are doing with their online term sheet generator. All of this helps to EDUCATE as well as AID and STREAMLINE the contracting process, all of which reduces costs, quickens deal flow and fosters innovation. We should be following the lead established by our cousins in the US and start doing something about it!

        Just my tuppence worth

      • CE


        Orrick not only has a term sheet generator, but also provides a number of forms for use by startups. See:

        Note that the Y-Combinator docs are designed for a very early-stage investment, not your typical seed, angel or Series A investment (and they contain a preference class, albeit “pref light”). The NVCA docs are a closer equivalent to the BVCA standard docs and they are much weightier.

        A better comparison to the Y-Combinator docs are those provided by Seedcamp. In fact, in an instance where Europe is actually ahead of the US, the Seedcamp docs are more balanced and Seedcamp only acquires ordinary shares.

  • Trace Cohen

    While I have never raised a round and hopefully will never have too – bootstrapping all the way – the only fee I have heard of is the application fee to weed out companies who don’t want to make the commitment. This is to save time on both sides.

    Obviously there is a a lot more that goes on behind the scenes but to make a start-up pay for these fees would be counter-productive. If the investment will pay for the fees great but that’s money down the drain that could have went to something else. I want to look more into this and find out which VC’s do and don’t charge their potential portfolio candidates.

  • links for 2009-09-29 « Blarney Fellow

    […] Guest post: The madness stops here – don’t pay a VC any fees Aside from the fact that it just doesn’t make sense to put money into a business only to take it back out again (like, WTF?!), these fees will also be distasteful to other prospective co-investors who might otherwise take an interest in your financing round. In other words, no investor happily tags along on a deal if the lead investor is lining their own pockets with the cash. (tags: vc startup) […]

  • Roger Nolan

    Making this post anonymous implies to me that it is hypocrisy. If LondonVC believes these maxims then surely they will be followed by their fund which would in turn be more appealing to entrepreneurs and hence lead to a better deal flow.

    That said, I would like to see all of these changes to the VC industry but it seems the power to change is nearly all in the fund’s partner’s hands not the entrepreneurs’.

  • AnotherVC

    In my view VC fees are corrosive and unhelpful. I would like to see more enlightened LP’s (the investors in funds) insisting that they are prohibited. However, many UK LP’s have very little experience (or interest!) in early stage tech funds and effectively not only make it possible, but through the way they structure fees positively condone the practice of covering the costs of managing their money through the investees. My practical suggestion is that the entrepreneur balances the net capital against the equity when comparing term sheets. Hopefully as the UK gains experience in the sector this problem will receed.

  • Fred Destin

    If I may say so, who cares about this and how is this meaningful to whether an investor is good value add? Stop bitching about things that don’t really matter. There are a lot of people out there trying hard to build the next Twitter or whatever and taking bets. Our market functions, let’s make it kick some serious ass.

    In fact this VC fee issue feels like a complete distraction. I have not seen VC fees for years; and frankly there is nothing conceptually wrong about fees or no fees, they are just different cahs-flow profiles. What if you have a super angel who has 55 lines in his portfolio and you want to secure his time ? Would paying him be wrong ? Not sure.

    In practice, the main problem I see with VC fees is … the type of VC’s who charge them rather than their existence. I have only seen this from people who tend to operate like private equity guys and are probably best avoided at early stage… 3i used to be a horrible offender in this field years ago even including monitoring fees.

    Devil’s advocate #1: small tiny fund that has small operating budget so it can operate at seed level but compensates its people with some kind of fees. Pricing is transparent and fair and partners of said fund work their butts off. What’s wrong with that ?

    Devil’s advocate #2: Mike McTighe is a super board member and he does that for a living including income. Why would you get him for free? And trust me, he’s great …

    As to legal fees, we always try to make them cheaper but getting your legal docs wrong will cost you more money in the long-term. Would be nice if we completely standardised series A terms and had a conveyor belt approach and making steady progress in that direction to make it cheaper.

    I know why LondonVC is anonymous — this is a one-size fits all post that focuses on the wrong debate. My name is on top if you want to chat :-)

    • Ed French

      Great reply Fred. Whilst I do believe that investor fees are generally a “bad thing”, this article appears to suggest that entrepreneurs should universally consider such fees a “deal-breaker”. I would suggest that there are far more important things, like the “value-add”, “capacity to follow”, and pricing. For the record, we do charge fees on some of our funds because that’s how our fund investors (at least in part) want to pay for the service. It’d be great to take this from the realisations, but I don’t think my mortgage lender would be OK with that!

    • huh back

      Great to see other VCs voicing their opinions here (anonymously or otherwise). But Fred, I think you’re only focusing on one aspect which is the non-exec fees. Even so, in your devil’s advocate case #2 Mike McTighe is not an investor representative or VC is he? Think this was all about VCs putting in money to drip it back out again.

      Anyway, you say you have not seen VC fees for years, but at least 2 commenters noted that they’ve seen arrangement fees stuck into their term sheets (perhaps these were only local/government funds) and I’d guess that’s the biggest concern. Thoughts on that?

  • Fred Destin

    @huh back (nice name)

    OK, so here it goes, two deals on the table:

    – £500,000 at a £2M pre from single fund, no fee
    – £500,000 at a £2.5M pre with arrangement fee of £50,000 because we aggregate a bunch of angels and we have no direct management fee from these guys and hence we have to do a lot of legwork to get the money together and we cannot attract talented people to do this without some kind of fee being paid by you, Mr Entrepreneur, but we will raise a bit more to see this done.

    I work for an institutional fund for a reason: i think simplicity is bliss. We don’t do fees of any kind and pay our own way.

    But an arrangement fee is just some cash out at the outset, it’s just accounting. If they are hidden, unclear, unfair, whatever, that’s all bad. The mere fact that they exist may jut reflect a different economic reality for the underlying fund.

    In fact seed vehicles do NOT generate enough management fees, so maybe arrangement fees are actually a good thing to help these exist and thrive? I don’t think this is generally the case, but there may be a guy out there who would be so good at it he could make it work. Fees, per se, are not wrong. Lack of transparency and the wrong mindset are.

    And sorry but yes, this is a complete sideshow…

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