Investor Fees for Participating In Self-Funded Search Investment

July 02, 2019

by a searcher in New York, NY, USA

Have any self-funded searchers charged investors a small fee to participate in the investment? The thought process behind this is for self-funded searches to recoup the funds they've spent searching. Curious to learn how many searchers are doing this and if investors have any issue with the fee.

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Reply by a searcher
from Harvard University in 2613 Highland Haven Dr, Austin, TX 78725, USA

Is the question targeted towards search expenses generally, or diligence expenses for the deal? Expenses not directly related to the deal like foregone salary, office expenses, CRM/marketing/website, and travel expenses for previous deals should be borne solely by the searcher. The risk the searcher took in incurring these expenses should be reflected in the larger equity position of a self-funded searcher compared to that of a funded searcher.

My view is that diligence expenses directly related to a self-funded deal (legal, accounting, other diligence, etc.) could be converted to equity, refunded to the searcher, or a combination of the two. I'd recommend the searcher communicate clearly to potential investors how they intend to handle these expenses and strongly consider what signal it sends. Investors should be looking at the deal as a whole, but I agree with Greg that rolling these in as equity will be more palatable.

As an investor, I wouldn't want the new CEO (with a majority ownership) so strapped for cash that they make myopic decisions to create some breathing room on their personal balance sheet. Conversely, I'd be hesitant to see a self-funded deal with zero co-investment - I would view diligence expenses converted to equity as co-investment.

Reply by an investor
from Harvard University in San Francisco, CA, USA

I've never seen it, but conceptually, I think it's a reasonable idea. It would likely be more palatable to argue that your expenses should be credited into the deal in the form of equity.

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