A reader emailed me the other day, said he found a VC that was interested in his business and the VC wants to charge him $10k for "due diligence expenses." My immediate response with the info I have on this is no way.
First, for our own firm (and others that we work with), none of us charge a fee for our time spent on deciding whether or not there is a match between us and the company. Of course, at the same time, the company should be spending time deciding whether or not they want to work with the VC.
It is very important for us to see as much of our investment go right to the company's bank account. Sure, when a deal closes there will be legal expenses that the company will have to absorb, but that's where we draw the line. And we negotiate hard with the attorneys involved to keep their fees down.
I am hoping the due diligence expense in this case is just an uncommon charge by a very trustworthy VC and not someone out there trying to ring up a bunch of fees. But, to avoid a trap, if a firm is charging you, ask the following questions:
* Is the firm actively investing in companies with a fund that is in place?
* What is their ratio - due diligence to actually making an investment?
* Do you have to pay the fee whether or not they make the investment?
* Are they doing anything above and beyond to charge a fee for due diligence (unique travel here in the US or abroad)? Something way out of the ordinary might justify it partially. But the charge should be "reimbursement for reasonable and approved travel" in this case.
* Have you spoken with other entrepreneurs that they have funded? Were they charged? What has their experience been like working with the VC? Also, track down some companies that they charged the fee to and didn't fund. Ask a similar question.
If you've gone through these questions, feel comfortable with the VC, try negotiating out of the $10k due diligence fee. With the competitive nature of the market, that VC should be willing to waive the fee so that they can just focus their efforts on getting into a great company. If they pass because you wouldn't pay them $10k, they probably weren't serious in the first place, consider it a red flag and run.
UPDATE: Other VCs have answered the same question.
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