The only conundrum larger than deciding whether to hire a financing consultant is how and how much you should pay one.
Often the first great divide in the compensation question is whether equity-aka a piece of the action-is involved. Robb says that while it's common to give up equity, in general it's not a good idea. "You want to limit the number of minority shareholders you have," he says. "They can cause problems down the road by themselves or in the eyes of other investors." Second, he says, if you issue stock to intermediaries before they raise any money, and they fail, you end up with shareholders you might not want.
The optimal compensation structure, according to Robb, consists of an upfront retainer and an accomplishment fee to be paid on closing and receipt of funds. "The upfront retainer might range from a low of $5,000 to as much as $25,000," he says. In the crudest sense, this is so-called "pay attention" money. It lets the consultant know you are serious and will listen to the advice he or she gives you. "The problem with pure contingency arrangements is that any and all advice prior to a deal is perceived as free and is often treated that way," says Robb.
As for the percentage of the amount raised, Robb says 5 percent is typical, though he points out that there are very few hard and fast rules. He adds that while 5 percent may seem like a lot, it's fair if you get a good deal. Says Robb, "If an advisor costs you 5 percent of the amount you raise, it's a good value because that allows you to concentrate on the true cost and terms of the other 95 percent of the deal."
David R. Evanson is a principal at Gregory FCA, an investor relations firm.