Success Fees on equity raises, what your split?

Anyone doing a flat % rate over a tiered percentage?

i.e.

• 3.0% of the 1st $10 million

• 2.5% of the 2nd $10 million

• and 2.0% on any amount exceeding $20 million

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WSO Monkey Bot

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2mo

Based on the most helpful WSO content, discussions around success fees on equity raises often revolve around the structure of the fee, whether it's a flat rate or a tiered percentage. The example you've provided is a tiered structure, which is quite common in the industry. This structure incentivizes the party raising the funds to secure as much capital as possible by offering a higher percentage for the initial tranches of capital and then reducing the percentage as the amount raised increases.

Here's a breakdown of how the tiered structure works, using your example:

For the first $10 million raised, the success fee is 3.0%. This means if $10 million is raised, the fee would be $300,000.
For the second $10 million (amounts from $10,000,001 to $20,000,000), the fee drops to 2.5%. So, if an additional $10 million is raised (making it $20 million in total), the fee for this tranche would be $250,000.
For any amount exceeding $20 million, the fee further reduces to 2.0%. Therefore, if $30 million in total is raised, the fee for the amount above $20 million (which is $10 million in this case) would be $200,000.

This tiered structure is beneficial for both parties. It ensures that the entity raising the funds is adequately compensated for the first, often more challenging, capital raised, while also aligning their interests with the fund-seeking entity by reducing the fee percentage as larger amounts are raised, making the deal more attractive to potential investors.

In contrast, a flat percentage rate is simpler and easier to understand but might not provide as much incentive for maximizing the fundraising effort. The choice between a flat rate and a tiered structure often depends on the specific circumstances of the deal, including the amount of capital being raised, the difficulty of the raise, and the preferences of the involved parties.

Remember, the key to structuring success fees is to align the interests of all parties involved, ensuring that the fundraising efforts are adequately rewarded while also providing good value to the entity seeking the funds.

Sources: When does the promote split actually occur?, How are you structuring equity split on personal deals?

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2mo

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