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The Banker's Share

What is a fair fee for an investment banker or consultant? The ISP-Investor list finds that rates vary widely.

[May 23, 2000]

On the ISP-Investor list in May, DL posted this query about the standard cut investment bankers might receive for raising funds:

"I am assuming that when retaining an investment banker/consultant to raise funds a fair cut of the deal is 5% of funds raised, a 1% equity stake in the company and coverage of expenses. Am I off base here? I have someone asking in for 10% of funds raised and a 2% share of the increase in our valuation at the close of each transaction we do."

One respondent remarked that the numbers seemed a bit high:

[MT wrote] "Did they have bandanas over their faces?"

Others agreed:

[SB wrote] "These numbers sound like they're based on the Lehman scale, which is typically used for merger and acquisition transactions. For an equity raise, 5-7% is in the ballpark, but each deal should be negotiated based on risk/difficulty. The fee for a public offering is 7%."

[DH offered this formula] "Ten and two is a quite high. Most investment bankers/brokers that I've worked with use a sliding scale of some sort: 5% of the first so many million and down from there to 1% of the remaining amount raised plus expenses and 1% equity."

Other respondents, however, reported that these rates were in line with their experiences:

[J wrote] "The rates we're seeing are between 15 to 20% plus an equity position."

[GS added] "It depends on how bad you need the money and how good your story is. Finders' fees can run as high as 15% of the raise without being unreasonable, although 10% is fairly common."

One respondent pointed out that the rate decreases as you raise more funds.

[DB explained] "The rate depends on size of funds. Try to tier it on valuation, so there is incentive."

JT added these thoughts on determining fees:

"We see success fees ranging from 5 to 8% of the equity capital raised. On an equity transaction, in addition to the cash component, options to purchase up to 10% of the shares being issued at the same price as the investor pays for some period (e.g., 2 years), should also be expected. Expenses and an up-front retainer, which is deducted from the cash success fee, are deal specific."

—End