Should Your Startup Hire a Finder?
Raising capital is not easy. While startup entrepreneurs usually have a strong network of people within their own industry, many entrepreneurs lack contacts at venture capital firms and other angel groups. And even if the entrepreneur knows about such funding sources, it’s difficult to get solid intros to such people.
Sometimes startups will run into a person who offers them assistance raising capital. This person is called a “finder.” The finder offers to help the startup find investors in exchange for a cash commission (usually in the 5-7% range) based on the amount raised through the finder. However, I’ve seen some pretty appalling finder commission structures, such as a 10% cash commission plus 10% warrant coverage.
My advice to your startup: Don’t hire a finder or broker for your startup, unless you have a compelling reason to do so. And “We can’t find investors on our own” is not a compelling reason.
But if your startup is still considering using a finder to help raise capital, I strongly advise you to vet this person or group:
(1) How successful has the finder been raising capital for emerging companies like yours?
A lot of finders may have experience raising capital for companies with a much longer track record and developed balance sheet (and of course, revenue & profit). These types of capital raises usually involve different investment structures and investors with different risk-tolerances when compared to your startup’s capital raise. For example, your finder’s network of investors may prefer investing in secured-debt deals rather than in unsecured securities of a startup. Thus, make sure the finder — and the finder’s investor syndicate — are both a match to your startup.
(2) Is the finder registered with FINRA and your state’s securities board?
Most likely, the finder offering to raise capital for your startup SHOULD be registered with FINRA (Financial Industry Regulatory Authority) and your state’s securities board. But the reality is, a tremendous amount of unregistered “brokers” (as defined by the SEC) are out there offering to raise capital for companies. FINRA offers an online broker check and so do most states.
Capital raising is hard, but finders are usually not life-savers for startups.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
View Comments
Raising capital should only be done with the assistance of professionals who have spent years developing relationships with accredited investors. Investors do not invest with strangers or in deals sent to them unsolicited or posted on a website. They invest in deals that have been referred to them by their trusted advisors.
VC firms receive 2,000 business plans per year. They look at 10 and fund 2. The 2 they fund are usually referred to them by attorneys, CPA's or financial consultants their have worked with in the past. You do the math at your chances of successfully raising capital without professional introductions.
One other comment, that many will find obvious, but has nonetheless affected at least one entrepreneur I know, don't pay a "retainer" to anyone that claims to have found money. This is a common scam that people use to take advantage of optimistic entrepreneurs. Make sure that they're paid on the back end, after the deal goes through, and make sure to get a good securities lawyer to structure everything properly.
Only licensed broker/dealers can raise capital on a commission or success-based compensation fee. If you hire an unlicensed person to "find" capital for your business and pay him a commission or other success-based fee both of you are in violation of state and federal security laws and face civil and criminal penalities. The fact that some people do this and get away with it does not make it legal. It just they have not been caught. Why do you think they have security laws?
I've invested in few start ups with a "finder" who gets a fee from these companies. I did a search on the finder and he is not licensed. I'd like to file a complaint and any advice on where to start would be appreciated.