Startup Comp Structure & Fundraising

Compensation in these situations usually comes as cash paid to you based on a percentage of capital you've raised.

For a company, it can range from 3-7%. The factors that drive this include:

• the size of the raise (a $5m raise is very different than a $2b raise)
• the type of business (mature versus growth)
• what kind of infrastructure you have (this is least material; some people can justify a higher percentage because they have an actual apparatus of multiple colleagues and a smooth enough machine that the deal gets done quickly through an effective process that does cost them some fixed expense to operate [e.g. materials generation, travel to visit each of their capital relationships, legal])

For a fund, it ranges from 1-3%. The factors here include:

• how established the fund is
  • Fund I for a new manager with a thin track record is very different than Fund VII for a mature manager
  • a credible, reputable shop with documented success will not tolerate relatively high fees the same way an upstart manager trying to establish itself will

• how large the fund is
  • the same way a GP is under duress for fee compression from LPs who accurately point out that you don't need 2% management fees on tens of billions of AUM, a GP can put duress on a placement agent who is raising them nine or ten-figure sums

• how much the GP values the new capital relationship
  • some GPs place a premium on certain types of LPs; illustratively, someone who can get a commitment from one of the APAC SWFs may happily pay an extra 50-100 bps to get a party that is notoriously sticky capital and thus likely to return with large checks for successive future funds

• the strategy or asset class the fund operates in
  • a hedge fund's operating expenses do not scale with the same steepness a private equity fund's do; within private equity, a late-stage growth equity fund's expenses do not scale with the same steepness than an operationally-intensive distressed industrials buyout fund's do
  • the GP's sensitivity to how much of their management fee they're sacrificing for the capital raise thus varies

(Note that with funds, the payment is almost always staggered over years. A 3% fee is probably paid out as 75 bps for four years or some similar format. In instances where the fee is lower, it can be due in a single lump sum [and GPs often have credit facilities set up against their recurring management fee income to handle SG&A expenses exactly like this].)

In your situation, I would probably ask for options (or if you're really bearish on the future success of the company, a blend of cash and options). It's a startup, which means you're probably raising them high six or low seven figures.

Getting 5% on a $1m raise is $50k. Hardly life-changing money. However, negotiating 200 bps of the cap table could yield to a seven-figure payday down the road.

Do some rough math. If you're raising them $1m on a $5m post-money, the money you got them is 20% of the business. Your ask for 200 bps in options is thus effective to a $100k placement fee ... which would be like a 10% fee on the $1m raised ... but you aren't actually taking cash out of their pocket, you're simply aligning incentives and asking to participate in the upside.

A convincing person could argue that 200 bps is actually cheap and go for more.

Good luck.