Monitoring and arrangement fees – reflecting the costs of investment

In venture capital deals, monitoring fees and arrangement fees are provisions that reflect the costs incurred by investors in managing and executing an investment. 

These fees are designed to compensate investors for the time, resources, and expertise they dedicate to the deal and the ongoing oversight of the company. However, they can become a contentious point during negotiations, as founders seek to preserve capital for growth while investors aim to cover their costs.

This article in our ‘Anatomy of a term sheet’ series explains how monitoring and arrangement fees are structured, their role in venture capital deals, and how founders and investors can strike a balance to ensure these fees are fair and aligned with the company’s goals.

What are monitoring fees?

Monitoring fees are recurring payments made by the company to the investor for the ongoing oversight and strategic support provided post-investment. These fees reflect the costs associated with the investor’s involvement, such as board participation, mentoring, and other advisory services.

Typical structure

• Amount: monitoring fees are often expressed as a percentage of the investment amount, such as 1-2% per annum, or as a fixed annual fee.
• Duration: they may apply for a set period (e.g., until exit) or for as long as the investor holds shares in the company.

Rationale

Investors often argue that monitoring fees are necessary to:

• Cover the costs of board representation, financial oversight, and strategic input.
• Reflect the time and resources dedicated to supporting the company.
• Ensure alignment with the company’s success by providing value-added services.

What are arrangement fees?

Arrangement fees (sometimes referred to as commitment fees) are one-time charges payable to the investor at the time of the investment. These fees are intended to cover the costs of executing the deal, such as due diligence, legal expenses, and structuring the investment.

Typical structure

• Amount: arrangement fees are usually set at 1-3% of the total investment amount.
• Timing: they are deducted from the investment proceeds at completion, reducing the net funding received by the company.

Rationale

Arrangement fees compensate investors for the upfront costs of:

• Conducting due diligence and engaging external advisors.
• Structuring and documenting the investment.
• Allocating internal resources to assess and close the deal.

Negotiating monitoring and arrangement fees

Monitoring and arrangement fees are negotiable and should be tailored to the size, complexity, and stage of the investment. Founders and investors often consider the following factors:

Stage of the company

• Early-stage companies: monitoring fees may be minimal or waived entirely to preserve cash flow for growth. Arrangement fees are typically on the lower end of the range to reflect the limited resources of early-stage companies.
• Later-stage companies: larger deals may involve higher fees, reflecting the complexity and increased costs of due diligence and oversight.

Value-added services

Investors who provide substantial strategic input, mentorship, and board-level support are more likely to justify monitoring fees. Conversely, founders may challenge these fees if they perceive the investor’s involvement as minimal.

Investor alignment

Founders should ensure that fees align with the company’s growth objectives and do not disproportionately benefit the investor at the expense of operational cash flow.

Offset mechanisms

In some deals, fees are offset against other obligations, such as dividends or management incentive payments, to reduce the financial burden on the company.

Market practices for monitoring and arrangement fees

Monitoring fees

• Standard market range: 1-2% of the investment amount per annum, with some investors waiving the fee for early-stage deals.
• Exemptions: often waived for companies in their pre-revenue phase or where the investor’s involvement is limited to board representation.

Arrangement fees

• Standard market range: 1-3% of the total investment amount, typically deducted at completion.
• Hybrid structures: in some cases, arrangement fees may be partially or fully reinvested into the company as equity to preserve working capital.

BVCA model and UK practices

The British Venture Capital Association model documents typically recommend transparent disclosure of all fees to ensure alignment and trust between founders and investors.

Analysis: founders’ perspective vs investors’ perspective

In summary

Monitoring and arrangement fees are an important aspect of venture capital term sheets, reflecting the costs and resources investors dedicate to a deal. For founders, negotiating these fees effectively is essential to preserve capital for growth while ensuring that fees remain proportional to the value delivered by the investor. 

By aligning fees with market practices and tailoring them to the company’s stage and needs, founders and investors can strike a balance that supports long-term success.

Read the next article in our "Anatomy of a term sheet" series, where we’ll explore exclusivity clauses and examine how these provisions protect deal certainty while managing founder flexibility.

If you're navigating the complexities of venture capital term sheets or preparing your business for investment, our experienced team is here to help. Get in touch to discuss how we can support you in securing the right deal for your business.