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Should I Pay My Venture Capitalist To Consult For My Company?

Q:  My company is backed by VC firm to whom we also pay a $2k/month "consulting fee." We have raised approximately $2MM from them in a Series A. Is that type of consulting payment typical in an early stage venture?

A:  (Jason)  I want to vomit again.  We received this question just a  few short days after posting that entrepreneurs should NOT pay their lawyers for introductions to VCs and how scummy of a practice that was.

Now today, we get this question.  This is even worse.  The answer is NO.  Companies should never pay their VCs consulting fees, board attendance fees, or any type of fees related to their involvement in their company.  I’ve never worked with a reputable VC firm that charges their companies to help them succeed.

As a venture capitalist, we are paid a management fee by our investors that is our "salary" and we receive a percentage of the profits (called "carry") on our fund.  We don’t get paid to sit on boards and certainly it is not appropriate for them to "round trip" your investment capital by paying themselves part of it. I would wager to guess if their investors knew they were doing this that the investors would revolt.

I’m sorry to report, but not only is this not typical, it’s unheard of in the venture world when dealing with reputable folks.

(Note, private equity is a totally different matter and fees are commonplace, but it’s a totally different model)

July 29th, 2008 by     Categories: Board of Directors, Fundraising, Venture Capital    
  • Jim K.

    Agree with Jason's post completely!!! In our case, our counsel has gone into his rolodex to introduce our portfolio company to VC's that we don't have a connection with. (this is a top firm intro-ing to top VCs).

  • Dave

    Intros are why you hire a start-up lawyer and why giving them a small chunk of common stock–vesting over time–and allowing investment in preferred rounds may be prudent.. As a former start-up lawyer, this sort of request though makes me sick just like the people who required 8% fully-vested warrants to represent a company. Dirtbags.

    • http://www.jasonmendelson.com Jason Mendelson

      Completely agree. Small equity pieces are one thing. Cash like this is another.

      • Jim K.

        equity isn't bad. I'd be more than happy to offer options to an outstanding legal advisor.

  • Jimmy

    One of the biggest law firm of Bay area billed me for $1000 for about 10 introductions…it was complete turn off…Next time I will send them business…I will ask for payment too.

  • Saul Lieberman

    Some factors that may make the success fee kosher:
    1.The lawyer makes the success fee arrangement clear before beginning the relationship with the client
    2.The lawyer bills at a substantially reduced rate in the Company’s early stages
    3.The fee is at the lower end of the range and/or is “payable” in equity
    4.The lawyer invests a substantial amount of unbilled time in the fundraising process

  • Phil Sugar

    Anytime somebody asks for a percentage of something or compensation for a simple introduction it really turns me off and makes me look down at that person.

    Basically the person is hurting both sides and the person that he/she is introducing you should be outraged as well.

    Think about it….he/she knows somebody well (theoretically a friend) and the only way they'll introduce them is if they get paid. So they aren't going to provide a good introduction without something in it for them.

    Obviously as Jason points out the introduction fee comes out of both sides in all cases.

    And finally it really whores out your relationships for lack of better term. If you're a good person you'll only want to do things that are a great fit. If you are getting paid you'll introduce to anybody regardless of fit hoping to get paid.

    No give thrice before you expect to receive.

    • Simon

      You are incredibly naive and ignorant.

  • http://meetkendall.com Kendall

    Agree with the answer and comments here. Your questions asks if you should reward “my lawyer” as opposed to “my law firm”. There are very reputable firms who have significant networks and will introduce you for free. Dump your lawyer and get a reputable firm or well known individual with integrity.

  • Aziz Grieser

    Wow, you started a live one here Jason.

    The knee-jerk “I'd punch your lawyer in the face” responses that I read in most of the answers above, while amusing, are fluff without the facts. But this question might deserve them.

    We both know that lawyers represent many of their clients for their investment making decisions, (ahem, “JASON MENDELSON VC – FORMERLY COUNSEL TO MOBIUS!”) and this “lawyer fee” may just be a smart way to get more equity out of a deal for their VC client. This, however, is very unlikely.

    Sounds like rookie league tryouts: players are nervous, rumors are spreading, and their agents are desperate. My advice, focus on knocking the ball out of the park. Make the coaches come to you.

  • Trish

    As an attorney who has spent most of her 10+ year career representing early stage tech companies, I second Jason's nauseous feeling completely. A good lawyer should always be looking for opportunities to help their clients become more successful – whether it's intros to VC's, banks, joint venture partners, service providers, etc. My old firm (back in the late 90's)did take equity in some clients where we deferred or reduced our fees (but never if we were charging our normal hourly rates).

  • http://blog.echosign.com Jason M. Lemkin

    Actually it's even simpler than the above. Any corporate attorney who wants to charge you for intros by definition can't deliver any intros of value. The top attorneys invest in the ecosystem and already have high personal ROI by making intros for their clients, without a fee. This guy is a loser best case, a con artist worst case.