http://kyield.wordpress.com/back-to-basics-venturing-part-1/

http://kyield.wordpress.com/back-to-basics-venturing-part-2/

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.

For what it’s worth: no good VC will charge arrangement, management, advisory fees. The big exception in the UK is VCTs, who do levy some advisory fees. This is their business model and you can take it or leave it. There are some great VCTs around, like Octopus.

Legal fees (if the deal happens) are always borne by the company. The reason for this is that it’s part of the costs of the investment and hence should out of the fund, not the management fees of the fund.

I’d say each party should bear their own legal costs if the deal falls through, but it is correct that some VCs less cool than e.g. my employer make this a sticking point.

Also, I can’t believe we are still discussing this stuff. As entrepreneurs, you expect VCs to understand your business model. Go read up and understand ours: http://www.amazon.co.uk/Raising-Venture-Capital-Rupert-Pearce/dp/0470027576

Also: Google.

Love,
Max

Orrick not only has a term sheet generator, but also provides a number of forms for use by startups. See: http://www.orrick.com/practices/corporate/emergingCompanies/startup/index.asp

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.

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

Interesting side note; I was approached some years back by a “gentleman” saying that he represented an Armenian investor. They wanted to invest 2mln Euro but weren’t interested in doing any due diligence. Talk about warning bells going off!
All I needed to do is meet them in a Paris hotel where they would give me the money (cash). All I needed to do was pay them a 10% fee on the spot. Also in cash.
Needless to say I didn’t proceed any further

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…

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?

The BVCA Model Documents are still up on the website but are very well hidden (http://www.bvca.co.uk/assets/features/show/Modeldocumentsforearlystageinvestments). 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.

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

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.

Brian

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’.