Illustrative case study

The fee that grew with the payroll

An uncapped percentage that rose each year as a startup hired, for the same adviser work: how the fee went from $20,000 to $100,000 in three years, and how a cap changed it.

Illustrative case study. The business, people and figures are invented to show how a situation can unfold. Any resemblance to a real business or adviser is unintended.

Fee type: Percentage fee
Red flag: Uncapped success fees
Company type: Startups

The situation

A software startup with 12 staff made its first claim with an adviser on a 20% fee of the benefit received. The claim was $100,000 and the fee $20,000, which felt fair for a first claim the business could not have made alone. Over the next two years the company raised money and hired: 25 staff in year two, 40 in year three. Illustrative figures.

What was signed

A clear letter: 20% of the amount received, payable when the benefit arrived, review support included, no cap. The founders had asked about a cap in year one and been told it was unnecessary for a claim that size, which at the time was true.

What happened

The claim grew with the payroll: $250,000 in year two and $500,000 in year three. The fee grew with it: $50,000, then $100,000. The adviser's work did not change much; the projects were the same, the interviews took the same two days, and the technical descriptions were updated rather than rewritten. In year three the finance lead put the three years side by side, saw a fee that had multiplied by five for work that had not, and asked for a cap before renewing. The adviser agreed to a cap of $60,000 per year, with the percentage unchanged below it. The relationship continued. Illustrative figures.

What it cost

Nothing that the letter did not say. The cost was $40,000 in year three above what a $60,000 cap would have charged, and the lesson was that a cap is cheapest to agree before the claim grows. Illustrative figures.

How it unfolded

Year one, 12 staffA $100,000 claim on a 20% fee. The fee is $20,000. A cap is discussed and judged unnecessary.
Year two, 25 staffThe claim is $250,000 and the fee $50,000, for much the same work.
Year three, 40 staffThe claim is $500,000 and the fee $100,000. The finance lead puts the three years side by side.
Before renewalA cap of $60,000 per year is asked for in writing and agreed. The engagement continues.

Illustrative figures.

The sum

Illustrative

Year one fee, 20% of $100,000A first claim the business could not have made alone: $20,000
Year two fee, 20% of $250,000Same projects, same interviews: $50,000
Year three fee, 20% of $500,000Uncapped: $100,000
Year three fee with a $60,000 capThe cap agreed at renewal: $60,000

Illustrative figures. Same claim and assumptions as the rest of the site.

What would have helped

Asking for a cap in writing at each renewal, not only at the start, using the script for asking for a fee cap. A worked example at double the expected claim, which the how are your fees calculated question asks for. The capped fees page shows how the model behaves as the claim grows. The percentage fee was the right model in year one: it cost nothing if the first claim failed and little when it was small. The uncapped success fees red flag page says when an uncapped fee is a problem and when it is not, and this company moved from the second case to the first as it grew.

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