Quick question for you all:
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?
Is this normal?
What kind of fees are usual?
Any experiences would be much appreciated.
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.
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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.
Whats with the trend lately to constantly trying to solve injustice with more injustice? That's just making more problems instead of less.
Why is this a generational thing?
Public shaming as an immediate reaction is fairly recent in the short history of the internet. The technology supported it easily in the 90s (or even late 80s using newsgroups), but it didn't become a common practice right away. Retweeting and hashtags seem to have turbocharged public shaming.
The social norms of my generation (49 yo, in California) required that one try to settle business disputes directly between the parties before resorting to public shaming. I still abide by that norm, even though I recognize that many people think differently. Which way is ultimately better for society isn't clear yet.
As a successful startup, there will be future rounds of funding. Any follow-on investor will eventually find out about problems on a cap table. They will probably fight to reverse it before an investment, or worse - it will sink the deal and the company. If OP's VC is a novice, maybe they don't know about liquidation preference. If they are not new, then perhaps the community should know about such divergent investment terms.
I agree about talking to a lawyer. But, in my experience, lawyers can find a way to make things work - and they won't stop a deal because of non-standard round terms. The non-standard terms hurt the company as they try to bring on additional investors. Any experienced founder or investor can provide guidance about how trying to "reinvent the wheel" for fundraising will cause problems down the line.
To OP, I suggest reading section 3 in this article by Roy Bahat: https://also.roybahat.com/dear-first-time-angel-investor-c6a...
It was a poor word choice.
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.
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.
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.
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.
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)
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...
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.
If they are a VC, this isn't typical - I'd run.
Is this VC also an investment bank or Private Equity firm? Those businesses are much more likely to tack on fees.
* 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.
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)
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.