The following is from Ask The VC, where Brad Feld and Jason Mendelson of Foundry Group answer questions related to venture capital investment and startups:
Q: My company is backed by VC firm to whom we also pay a $2k/month "consulting fee." We have raised approximately $2MM from them in a Series A. Is that type of consulting payment typical in an early stage venture?
A: (Jason) I want to vomit again. We received this question just a few short days after posting that entrepreneurs should NOT pay their lawyers for introductions to VCs and how scummy of a practice that was.
Now today, we get this question. This is even worse. The answer is NO. Companies should never pay their VCs consulting fees, board attendance fees, or any type of fees related to their involvement in their company. I've never worked with a reputable VC firm that charges their companies to help them succeed.
As a venture capitalist, we are paid a management fee by our investors that is our "salary" and we receive a percentage of the profits (called "carry") on our fund. We don't get paid to sit on boards and certainly it is not appropriate for them to "round trip" your investment capital by paying themselves part of it. I would wager to guess if their investors knew they were doing this that the investors would revolt.
I'm sorry to report, but not only is this not typical, it's unheard of in the venture world when dealing with reputable folks.
(Note, private equity is a totally different matter and fees are commonplace, but it's a totally different model)
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