Corporate & Securities Law

Should Your Startup Hire a Finder?

By Ryan Roberts

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.

Full post as published by The Startup Lawyer on October 02, 2009 (boomark / email).