Lehman Scale

Understanding The Lehman Formula: What Founders Need To Know About Fundraising Fees

When it comes to raising capital, especially through advisors or intermediaries, one question always pops up: how much does it cost? One of the most common answers is still the Lehman Formula: a standard commission model used to calculate success fees in fundraising.

But what is it, where does it come from, and how should growing companies approach it today?

The Origin Of The Lehman Formula

Let’s start with the obvious. Yes, the Lehman Formula is named after that Lehman Brothers. In the late 1960s, they introduced a simple structure to bring order to the chaotic world of fundraising fees. Before that, commissions were inconsistent, unstructured, and often impossible to justify.

So they created a formula. A scalable model designed to make private capital raising more transparent and predictable.

The traditional Lehman Formula works as follows:

• 5% of the first 1 million raised from investors 
• 4% of the second 1 million raised from investors 
• 3% of the third 1 million raised from investors 
• 2% of the fourth 1 million raised from investors 
• 1% of everything above 4 million raised from investors.

It’s tiered to reflect effort: the first money in is the hardest, the last is (usually) easier. The total fee scales with the size of the raise, but not linearly.

Variations In Practice

After the ‘70s the formula was changed and adjusted in order to compensate for the rocketing inflation and in some cases a ‘Double Lehman’ (10% - 8% - 6%...) or similar variations were introduced to keep the fees relevant.

Want to dig deeper into the history or mechanics? Check out the articles on Wikipedia or Investopedia to know more about this topic.