Transaction fees (payable on completion of a funding round) and monitoring fees (payable during the life of an investment) are commonly negotiated in VC fundraisings. For many investors these are an essential economic component of transactions, recognising transaction costs and deal execution risk and the ongoing contribution of the investor during the life of the investment.
In a competitive fundraising process, they can signal the balance of negotiating leverage, and founders and investors should agree early on what is being paid and why it is justified. The key issue is whether the fee reflects genuine, additional value or simply transfers an investor cost to the company. A well-structured fee can recognise substantial work and post-investment support. A poorly defined fee can create friction, duplicate other charges and weaken alignment between the investor, the board and management.
Transaction fees: Justify the charge at completion
Transaction or arrangement fees are commonly payable when the investor completes the investment round and are typically paid from the investment capital (so the company will effectively receive the investment sum net of fees). Founders and company board should consider whether the amount is proportionate to the work undertaken and ensure that these fees are not duplicative of other costs. These fees should be transparent alongside legal, diligence and other deal costs.
The principal negotiation points are:
- a clear fixed amount or cap, rather than an open-ended entitlement
- no duplication between the fee and reimbursed external or internal costs
- an agreed approach to abort costs if the transaction does not complete
- visibility at term-sheet stage, so the company can plan its funding requirement and avoid a late re-trade.
For larger rounds, companies with stronger leverage may seek a fixed or stepped fee, a waiver or an offset against other investor charges. Investors should be prepared to explain the work and value supporting the fee.
Monitoring fees: Link payment to demonstrable value
Monitoring, board or oversight fees are more sensitive because they may continue throughout the investment period.
The founders’ focus should be on accountability: what additional services will be provided, by whom, and how will the board assess whether those services remain useful and ensure that the investor is delivering value.
A robust provision should address:
- specific services and the identity of the service provider
- a fixed fee, annual cap and proportionate review mechanism
- board approval and appropriate conflict management
- no double recovery for ordinary shareholder, director or fund-management activity
- automatic termination on exit, loss of investor rights or cessation of the relevant services.
The strongest commercial protection is not simply a lower number. It is a fee that is measurable, reviewable and capable of ending when the underlying value is no longer being delivered.
What the market data tells us
The HSBC Innovation Banking Venture Capital Term Sheet Guide* indicates that arrangement and monitoring fees are not universal and become less common in later rounds. Where arrangement fees appear, between 2% - 5% are the most frequently observed levels. Monitoring fees are usually fixed annual payments and, where expressed as a percentage, 2% is the most common figure.
The practical message is one of negotiability. Market evidence can help test whether a term is out of line, but it should not replace a deal-specific assessment of the investor’s contribution, the company’s stage, the size of the round and the parties’ relative leverage.
Commercial priorities for investors and founders
- Put fees on the table early. By insisting that these form part of the initial offer/term sheet they full value of the offer can be properly assessed and benchmarked. Late disclosure undermines trust and can disrupt completion.
- Prevent duplication. Separate genuine additional services from ordinary investment management and director responsibilities.
- Build in discipline. Use caps, review rights, approval controls and clear termination triggers.
- Treat market data as informative, not an answer. The right outcome depends on the particular company, round and investor proposition.
Fees should support, rather than dilute, the partnership between investor and management. Clear justification and disciplined drafting allow investors to be rewarded for their contribution and work while preserving transparency, accountability and alignment throughout the investment.
DWF has the largest venture and growth capital group in the UK with over 85 lawyers in 9 offices, and supports investors and companies across several sectors including financial services, technology, media and telecommunications, life sciences and healthcare and real estate and infrastructure. If you have queries on any of the issues covered in this article please contact one of our experts: Dhruv Chhatralia BEM, Darren Ormsby, James Bryce, Scott Kennedy, Will Munday, Matthew Judge, Francesca Kinsella, Graham Tait, Kartik Monga and Rosie Spencer.
Contributing authors: George Robinson & Beloved Ogundipe
* Based on 711 signed term sheets including 643 involving UK-headquartered companies.
