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Costs

There are various costs associated with securing external funding and this section is designed to provide some general guidance regarding the type of costs to expect and when such costs arise.

In most cases the majority of the costs will relate to third parties, such as lawyers, accountants and venture capital funds or business angels co-investing with the London Technology Fund (LTF).

Whilst it is not possible for us to be precise about costs in advance, we should be able to give you a clear indication of the likely costs once we have evaluated your proposal and discussed likely co-investors. Fees charged by different co-investors vary according to whether they are other venture capitalists, corporates or business angels. Other costs will vary according to the nature and complexity of the particular investment. Our own fees will be clearly laid out in writing when we make an offer of funding to you.

Finally, please note that most of the fees described below are payable out of the investment and that no fees associated with our investment will be charged until:

  • we have completed our initial assessment (see investment process);
  • we have made you an offer of funding in writing; and
  • you have accepted the terms of our offer of funding.

We have analysed the likely costs in two parts:

  • Investment costs, which relate to the one-off costs of the particular investment
  • Ongoing costs, which are calculated on an annual basis

We hope this section will be useful, particularly to those unfamiliar with the process of securing external funding. For more information you may also wish to see the book, Sources of Finance and Advice for SMEs in London, which includes a chapter on the costs of raising finance. An online version of this book is available on the Company Guides website.

Investment costs

These relate to the costs of the particular investment and are not annual charges. They include what is known as arrangement fees, due diligence fees and legal fees. The arrangement fees are paid to LTF and co-investors; due diligence fees are paid to third party experts; and legal fees are paid to lawyers for the necessary advice and documentation relating to the transaction. These are standard fees, although it should be noted that the amounts vary. In particular, legal costs will vary according to the complexity of the deal.

An indication of the types of costs that you might expect is as follows:

  • Arrangement fees:
    • Arrangement fees are normally expressed as a percentage based on the sums invested. They are charged by LTF and co-investors and paid out of the investment.
    • For the purposes of calculating likely costs, you need to know what fees each of your investors charges. Our arrangement fee will typically be the same as the fees charged by other investors.
  • Due diligence costs:
    • These are fees charged by third party industry, technology and financial experts to conduct due diligence on your proposal from a commercial and financial perspective prior to completion of the proposed investment. These experts may also make useful recommendations to you.
  • Legal costs:
    • These are fees charged by lawyers for providing the necessary advice and documentation, and will vary according to the complexity of the deal. These fees are paid out of the investment and relate to work undertaken for you and for investors.
    • We strongly recommend that you work with a lawyer who has experience of small venture capital investments and who is prepared to work for a fixed or capped fee. To help you, we will inform you during the process of firms we know who do this and we will provide you with copies of standard documentation which has been prepared to minimise costs and allow advisers to concentrate on key issues. We also suggest that we try to negotiate all substantive commercial terms with your company as early as we can in the process, so as to reduce legal costs later on.

Ongoing costs

These relate to the ongoing costs of having secured investment. They typically include monitoring fees charged by investors; non-executive director fees, where investors require the appointment of an additional non-executive; and, in some cases, consultancy fees.

  • Monitoring fees:
    • It is normal for venture capital investors to charge an annual monitoring fee, which is expressed as a percentage of the sum invested.
    • We would expect all venture capital co-investors to charge similar fees.
  • Non-executive director fees:
    • Some investors may take a board position and may charge a fee for this role.
    • We will not take a board position ourselves. However, a good non-executive director can add significant value to your company in terms of contacts, skills and experience, and we may introduce a suitable third party non-executive director if one is needed.
    • Remuneration for a non-executive director is negotiated between the non-executive and the company and any fees are paid by the company to the non-executive. We are happy to provide guidance on the normal commercial rates that you should expect to pay.
  • Consultancy fees:
    • Some investors will charge consultancy fees.
    • We do not charge consultancy fees.

Please be sure to read this important legal information.