How do you get an advisor to really work hard to help you get funded? What's fair compensation for that effort? What if they only make an introduction?
This is the text you often find in "Funding Finder" agreements:
"Should an Investor invest in Client’s Company, then Client agrees to pay Consultant six percent (6 %) of the amounts invested by Investor."
But first, make sure you don't break the law. A "finder" usually needs to a registered broker-dealer or, you need to determine that the intended activities do not require registration.
Once you got that out of the way, there are a few types of compensation available:
- Equity (options, warrants, value participation etc.)
- A standard fee or percentage of money raised (cash)
- Credits/referrals for supporting you (for advisors who are building their brand)
- Promise for future paid work for the startup
What do you have to value?
- Introductions (network)
- Guidance and ongoing services (wisdom and time)
- Impressing the investors (usually the founder's job though)
- Getting the deal closed (valuable and hard to find skill)
Typically, short-term work (preparing the round, introductions, paperwork) are best paid right away with cash equivalents. Equity is best tied to ongoing responsibilities and added value.
Finding money is not easy. The below % reflects that. Your desire for speed and willingness/ability to do this yourself will determine if you find this worth it.
The following scale (the Lehman Formula) is sometimes used for cash payments:
- 5% finder’s fee on the first $1 million raised
- 4% on the second million
- 3% on the third million
- 2% of the fourth million
- 1% for more than $4 million
Equity packages can be double of the above.
This is a big decision. Don't sign an agreement that you downloaded of the internet. Involve a lawyer. Verify sure you work with someone who is a registered broker-dealer or make sure your finder's services don’t require broker registration (for example mentoring, advising, introductions, but not closing the round). Consider paying a fixed-fee regardless of the outcome of the introductions to make this all easier.
Finally, CEOs and Founders who lead the fundraising themselves are most likely to be taken seriously. It's the best test to see if they will also be able to market and sell it to customers.