
Ask HN: Is it normal for VC to take a fee on exit? - 3rdtry
Hi All,<p>Quick question for you all:<p>Have any of you been asked for a % fee from their VC on a term sheet being tabled for acquisition to help close the deal?<p>Is this normal?<p>What kind of fees are usual?<p>Any experiences would be much appreciated.
======
philip1209
I feel like you should name and shame, to some degree. Ask the VC for a
reference to another portfolio company who had this arrangement. Or, cold
email their other founders and ask if they have this arrangement. Email any
other investors you have to ask whether this is ok. My guess is that the
investor knows they are being greedy, and they know that their reputation
would get hurt if others knew they were doing this. If it's not a shady
action, then I think nobody will fault you for asking around.

I don't necessarily think the VC has bad intentions. But, it sounds like they
are trying to change the terms of an existing agreement. That, to me, seems
unethical. Talking about these shady actions publicly tends to cause the
community to self-police a lot. Perhaps another investor will inform this VC
that they make money now, but hurt deal flow later, by taking actions like
this.

\--

One other thought: you could say something like "the company lawyer says this
is not a normal arrangement and wants specific paperwork due to SEC deal maker
rules. Can you have your lawyer send us the proposed agreement?" My guess is
that they will drop it then they realize it will cost $10k in legal fees to do
this, and it might even be illegal to do contingency fees without being a
registered deal maker with the SEC.

~~~
quickben
No. He should not name and shame, he should go talk to a laywer.

Whats with the trend lately to constantly trying to solve injustice with more
injustice? That's just making more problems instead of less.

~~~
optimusclimb
> Why is the latest generation constantly trying to solve injustice with more
> injustice?

Why is this a generational thing?

~~~
tlb
Because the previous generation could only publicly shame through the press,
and the press was reluctant to print potentially libelous attacks.

~~~
PeterisP
I'm not seeing anything potentially libelous in this proposal (assuming that
the OP claims are not purely made up), as truth can't be libel.

~~~
jasonbarrah
I think he was commenting on the generational trend. There is naturally going
to be a shift when two billion new users enter a media landscape that was
previously only occupied by a few professional firms. In addition, I think it
would be hard for an intellectually honest person to deny that in the current
age of click bait news that agencies of all stripes are running articles with
less corroborating evidence than they would have in the past so as to be the
first ones to the scoop. Unfortunately, Russian facebook trolls have set the
new burden of proof for online kangaroo courts, and it is not much.

------
ilikehurdles
Apologies for the meta commentary, but I just want to say that I'm glad these
kinds of questions still get asked and can reach the front page of HN. Ask HN
and Show HN were the two big things that attracted me to come here.

------
NYCounihan
It's an unusual term that I haven't seen before.

I'm of two minds here:

1\. If the investor is a former rainmaker banker who will go above & beyond in
the transaction, effort that would normally cost you $mm's, she might be
justified. She could also have factored that "value add" into a lower
valuation rather than in a separate right.

2\. Ascribe a monetary value to the term and adjust other areas of the
financing (valuation, control rights, etc) accordingly. There is nothing
unethical about issuing unusual terms as long as all parties are informed and
it is done transparently.

------
3rdtry
Hi All,

I am not looking to name or shame. I'd love to just understand the experience
of others within the community and get more understanding of everyone's view
on this request.

To be fair, until this point the VC in question have been good to work with so
it's not the usual nightmare investor rant. I was just shocked at the request
from a preference shareholder that I thought would have real incentive to do
this, at the same time I don't want to damage a relationship. I get covering
costs, some kind of bonus incentive with a fixed fee, just not what is
essentially increasing their equity holding.

Any experience or examples would really help me get more of an understanding
outside of my own direct network.

------
tptacek
It would be really useful if the responses offering firm advice on this thread
could indicate whether they'd had experience successfully raising VC in the
past. There are a lot of opinions about how VC should work on this forum, but
the question here is pretty specific. They're not asking whether HN in general
_thinks_ this is OK.

------
d0ne
Not normal. Walk away from this investor. Will save you a lot of time, and
emotional distress, in the future.

------
yeldarb
To be clear, is this VC already on your cap table or are they just a
_potential_ investor in the next round that won’t be happening because of the
acquisition?

------
emdowling
The only clause I've seen which is similar was from a crowd-funding firm who
had some administration fees around the collection and transfer of the funds
to the company. It was rather nominal and was fair given the work they'd done
and the number of investors they worked with on our behalf.

------
bosaisi
I've never heard of that. Typically, the acquired firm hires an investment
bank to handle the sale. The VC is already highly incentived to do what they
can to help due to their equity holding, for example using their network to
make intros to possible acquirers.

~~~
charlesdm
I guess it depends, as the incentive structure differs. The VC is likely
trying to squeeze some extra fees out for a different role he's fulfilling.

If I own 20% of a business worth $50m as a VC, and I run a $10m fund, then I
will make 20% carry on the $10m exit. That's $2m in my personal pocket, pre-
tax.

If I can facilitate a deal through a highly personal contact (i.e. close
friend) where the company is sold to BigCo for $50m, and I can also charge 2%
of the acquisition value to all investors (i.e. in line with what an
investment bank or broker charges) then I pocket another $1m. So now I made
$3m.

There is nothing inherently unethical about wearing two caps if you actually
put a deal together -- whether that is raising capital (equity or debt) or
facilitating something. Though in this case there MIGHT be a conflict of
interest. But taking small percentage commissions is very common in business
on certain transactions.

~~~
Brushfire
I disagree.

If an investor is already invested in my company, then the expectation is that
they are _already_ trying to help me fundraise from future investors _and_
helping me to realize exit with potential acquirers. So I shouldn't have to
pay extra.

Obviously there is likely more to this story, but on the average this feels
perverted.

~~~
charlesdm
If this is the rising star in your investment portfolio, you're totally right.

But if it's a sinking ship then the personal relationship might be worth more
to the fund manager than trying to save it by making a small acquisition.

Honestly, like you said it all depends on the context and we're not hearing
the full story.

I also wouldn't be surprised to see this more in Europe, where most of the VC
funds invest government money (money from the EIB, local government funds,
etc)

------
sharmi
No It is not normal.

Atleast, based on the experiences of Rand Fishkin (of Moz.com fame ) as
recorded in his autobiographical book [1] "Lost and Founder: A Painfully
Honest Field Guide to the Startup World". In it, he elaborates on his
experience with working with VCs at different stages and what is normal and
what is not. It should be required reading for anyone working with or
approaching VCs.

His Arguments: Since VCs already profit from your acquisition, they are part
of the team. They are stakeholders just as you are. The main reason they are
allowed on board, is so that they can provide advice on how to lead the
company. So no fees for advice or such.

Also, another important aspect he points out. Sometimes, what is good for you
and your company is at odds with what's good for a VC. Thats because VCs
expect enormous growth from the successful companies to offset the loss of
investment in the startups that don't pan out. A startup with a more modest
year on year growth does not cut it from them. Yet that might be the best
strategy for you and your startup.

It's been some time since I read it, so I am a bit rusty. He enunciates all
this much better.

[1] [https://www.amazon.com/Lost-Founder-Painfully-Honest-
Startup...](https://www.amazon.com/Lost-Founder-Painfully-Honest-
Startup/dp/0735213321)

------
cpb
Maybe they wished they had preferred shares? There are better vehicles for
this, worked out far in advance of the liquidity/change of control. You
shouldn't be surprised by the actions or requests of a shareholder during an
acquisition.

Does your shareholder agreement include a "drag along" clause? What percentage
of shareholders are required to vote in favor of the acquisition? I would
check to make sure they can't screw up the vote if you don't take their (a bit
worrying) offer.

------
relaunched
It sounds like, at the last minute, you are going to find out they aren't the
VC, they are a broker-dealer looking for a payout.

If they are a VC, this isn't typical - I'd run.

------
mathattack
If it’s an ugly situation, VCs can play hardball. For instance, if another
investor is squeezing them (or squeezed them in a prior round) this can be
their way of getting back at them. It’s one reason to be very careful who you
give veto power to.

Is this VC also an investment bank or Private Equity firm? Those businesses
are much more likely to tack on fees.

------
3rdtry
To add context:

* The VC has already invested in our co. * A term sheet has been put forward for acquisition of our co. * They want a fee to help close the sale but it is a % rather than a $ sum. * VC have been good to date, no complaints. * I have also invested small amounts in co's I am passionate about. Always helping with intro's / tech advise within my area of expertise, often putting in many days of work. I do this because I like the founders, am passionate, curious about their product and always end up learning lots this way. I would never dream of asking for payment unless hit with a direct expense, expecting any payback to come at liquidity and a hopefully good feedback if anyone else asks about me.

Still trying to guage if my personal code working with startups is out of line
with industry in general. I don't have significant VC experience and
appreciate that there is some value add here.

~~~
staticautomatic
If they're asking for a cut to shop and help close the deal then they're
playing banker. That's the kind of thing bankers do. It would blow my fucking
mind if they wanted a cut to shop their own exit. If that's the case you
should be profoundly distrustful. Either way lawyer lawyer lawyer.

~~~
lancewiggs
Unless, as someone mentioned above, they invested just a little bit and this
deal will be making fortunes for others AND they are putting huge efforts into
the deal process. In this case they are acting as a banker who happens to have
a stake. I don’t like it but if you compensate them based on uplift from the
proffered term sheet then that might be palatable.

But if they are trying to stall the deal unless they get paid then charitably
they may be saying this is a premature and under market price and they are
only happy, if the founders want out, to get their return through the top up.
Uncharitably they see they can stop the deal and have negotiating power and
are screening everything until they get paid. Overall a deal needs everyone to
smile to get done. If they make you a lot more money over the offer then it’s
ok to make them happy - as long as all shareholders agree. If they just need a
kicker to make everyone else happy then you might need to grimace and pay, and
I imagine sign an NDA. That’s not a great way to do deals but it is an exit.
(VC - and we never charge the companies anything)

------
gumby
This is unreasonable and I would be surprised if it's permitted by their
agreement with their customers (umm, I mean "limited partners"). Not that you
could find that out.

Note that their customers are already paying them 2% of the commitment every
year to pay their expenses. So it's already unreasonable that most VCs use the
capital invested to pay their own legal costs (that's supposed to come out of
the 2%!). Having them transfer additional funds they pay you back to
themselves borders on fraud (the LPs are committing money on the promise that
it will be invested in _your_ growth).

If you have another VC option I suggest you take it -- this may be a sign of
problems to come.

If you have no alternative...well you have no alternative.

------
austenallred
No. Run.

