Fund Structure
Broken Deal Expenses
Last updated
Quick Answer
Costs incurred during due diligence and negotiation of investments that ultimately do not close, including legal fees, consultant fees, and travel expenses.
What it is
Broken Deal Expenses are the costs a fund incurs in pursuing potential investments that fail to close. These include legal fees for term sheet negotiation and document drafting, technical due diligence consultant fees, travel costs for company visits, background check expenses, and other out-of-pocket costs. Whether these expenses are borne by the fund (and thus by LPs) or by the management company varies by LPA. Most institutional-quality LPAs specify that broken deal expenses are a fund expense, reducing investable capital. Some LPAs cap the total amount or require that broken deal expenses be offset against management fees. High broken deal expenses can signal an inefficient investment process, poor deal pipeline quality, or overly aggressive pursuit of competitive deals.
In Practice
A fund spends $180,000 on due diligence for a potential Series B investment—including $120,000 in legal fees, $40,000 for a technical assessment, and $20,000 in travel. The deal falls apart during final negotiations when another investor wins the round. The $180,000 is charged to the fund as a broken deal expense, reducing the capital available for actual investments.
Operational context
What good looks like
The term is tied to a real workflow, not just a definition.
Ownership, timing, and evidence are clear.
The reader can tell what decision the concept supports.
Related terms point to the next useful explanation.
Why It Matters
Broken deal expenses directly reduce the fund's investable capital and ultimately LP returns. While some broken deals are inevitable in a competitive market, excessive broken deal costs signal process inefficiency. LPs should review how these expenses are handled in the LPA and monitor them in quarterly reports.
VC Beast Take
Broken deal expenses are the hidden tax on venture capital that LPs rarely see clearly. Top-tier funds can spend $500K+ on deals that never close, but this selectivity is often what separates great funds from mediocre ones. The real issue isn't the expense—it's funds that rack up broken deal costs without the discipline to walk away from marginal opportunities.
Related tools and reading
Further Reading
ILPA Due Diligence Questionnaire (DDQ): Template and Best Practices
The ILPA DDQ is the standard framework institutional LPs use to evaluate fund managers. Learn what's inside it, how to complete it, and best practices for emerging managers.
VC Fund Compliance in 2026: What Every Emerging Manager Needs to Know
SEC scrutiny of private funds is at an all-time high. Here's a practical compliance guide for emerging managers covering registration, policies, and common pitfalls.
Frequently Asked Questions
What is Broken Deal Expenses in venture capital?
Broken Deal Expenses are the costs a fund incurs in pursuing potential investments that fail to close. These include legal fees for term sheet negotiation and document drafting, technical due diligence consultant fees, travel costs for company visits, background check expenses, and other...
Why is Broken Deal Expenses important for startups?
Understanding Broken Deal Expenses is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Broken Deal Expenses fall under in VC?
Broken Deal Expenses falls under the fund-structure category in venture capital. This area covers concepts related to how venture capital funds are organized, managed, and governed.
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