Who should pay the fees, Startups or the Investor?

February 11th, 20102:05 am @ f3 fund it

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Who should pay the fees, Startups or the Investor?

BY F3FUNDIT

Who pays the fees, should it be the startup? Most Investors will tell you yes. Or should it be the Investor, which most startups will simply expect. The story is however that is depends on a number of factors.

What are hose factors and how do you know who, when, how, why, what, where, and huh? Well that’s why we’re here to help navigate some of the murkier waters of your startupedness. With that, first thing’s first. You need a solicitor (attorney, lawyer), someone you can trust and who knows the corporate side of things, remember each country’s laws are different so if your an S.A. don’t get a lawyer do deals with Ltd.’s. In terms of getting one, network, network, and then network some more.

Now that you’ve got a solicitor, you can go and start talking about financing. If you were introduced to a BA by someone, chances are they’ll want a finders fee, this can range anywhere from 3% – 10% of deal size, and in some extreme examples has even hit 15%, mostly the % will be a +/- 1% of the market you’re in. Spain averages on the lower side of the spectrum, whereas the UK is on the higher side of it.

Aside from this you’ll have legal fees – issuance of new shares, dilution of your own, and even if you do have an MBA, all this will undoubtedly still be confusing at the onset, add to that a finders fee for a facilitation intermediary if there is one, hourly solicitor rates, administrative expenses, filing expenses, etc… etc… and with a seed investment of say €100.000, those bills can quickly add up to 10-20% of the total investment, and all of a sudden your 100k that was supposed to take your co. international looks like it just might flop on its bottom.

So who pays the fees? At the end of the whole fiasco it’s both of you. If the startup pays from invested capital, it’s really getting a fraction of that invested capital, and if an angel pays then that angel is throwing that money away ontop of the investment. Likewise, if the money comes out of company coffers it’s pretty silly as that cash is inherently dedicated towards operational expenses. In which case if you’re lucky enough to find yourself with a willing investor, we recommend the following.

When dealing with an angel be up front about the fees and additional costs, if you need 100k to get to operational business level 2, find out before hand what fees and additional costs will come into play.

Now, say you do need that investment of 100k into your company to bring it to the next level, fees will be 10% meaning a total 110k for the cash transaction. That 10k will go to lawyers, administrative expenses, what have you, and is a sunk cost, no ends or buts about it. But aside from the lawyers who can benefit from it? The truth is the investor more so than the startup. Why? Because many nations in the EU, (mind you not all, so be sure to look at your local laws) – offer a tax shield for business angels. Meaning, that if I as a business angel invest 100k into company X, I can write of 10-20-30% of that investment off of my taxes for the year of investment, additionally, if the company fails, I may be able to write off an additional say 20%, thus decreasing my risk and making my investment contribution a fraction of the actual sum.

In which case, if you can write off that 10% in year one per se, the investment on behalf of the angel would really be 99k instead of the equity for cash injection of 110k. That shield does not apply to the startup, and your law / admin fees will go on your books as just that, the are not depreciable, the are sunk costs that eat up your cash.

So the next time you find yourself at a round table with a few BA’s or are a BA yourself, just remember that there are numerous things you can do to lower your risk in any new venture. It’s not just about investing, it’s about doing it in an intelligent manner.