Choosing a Finder When Raising Capital

If there's one thing entrepreneurs hate, it's having to ask others to invest in their company. It takes time; it's embarrassing and sometimes humiliating; it defocuses them from running their business; and, for most, it's not a skill set they're blessed with. Successful fundraising requires:

• Great writing skills
• Superb salesmanship
• A gold-plated rolodex
• Excellent closing skills
• Patience and persistence

Let's face it, the typical small-business owner is often lacking in most of these talents. So when the need for some serious cash to accelerate your business arises, what do you do? Generally, the first thing everyone does is to try raising the cash on your own. But you can only take so many unreturned phone calls, missed appointments, broken promises, lies and pure, out-and-out rejections.

At some point, you may be tempted to hire a professional "finder." Technically, a finder is someone who purports to be an expert at helping entrepreneurs find money (or rather the sources that will invest the money). Finders have a mixed reputation in the industry because they're substantially unregulated and have a history of overpromising and underdelivering.

So what exactly do finder's offer? What do they charge? And how can you tell a good one from a bad one? The answers are not all that clear. First, the value proposition is quite simple--they'll help you find money. If your cash is running low, this can be a most tempting offer, especially if you're desperate. And herein lies the first caution: Be wary of seeking a finder when you're desperate. You'll most likely make the wrong decision and pay dearly for it.

The SEC, which regulates money-raising activities, sees a finder as someone who's acting as a promoter of the sale of securities and thus is required to have a Broker Dealer license. If they don't, then (a) they're acting illegally and (b) any contract they sign with you is unenforceable--and therefore any portion of their fee that's based on a percentage of the money raised isn't collectable.

Some finders try to get around this by structuring their fees to appear as if they're all about consulting. Others just ignore the law and take their chances. Here's the first problem: There are some very good, unlicensed finders out there. Being licensed adds a huge expense and regulatory burden that many finders would prefer to avoid. So when you're on the hunt, the first questions you need to ask are:

1. Are you licensed? If not, why not?
2. What's your track record of success?
3. How do you collect your fees if you're not licensed?

The next area of concern should be in how the finder charges for their service. Generally, finders will want a retainer fee plus a success fee paid if and when they raise the money. Now, if the finder is good, such a structure isn't a problem. But here's where this group earns their poor reputation. The non-principled finder charges a retainer fee because they know it's the only money they'll be able to collect. The principled finder will charge a retainer fee both as an indication of the entrepreneur's commitment to the process and because it will take some digging before they can determine if the deal is fundable. If the deal turns out to have holes, they want to be compensated for their time. In exchange, the entrepreneur will know why, in the finder's opinion, the deal isn't fundable at this time.

Typically, a finder will charge a modest retainer of $2,500 to $5,000 a month for a pre-set period of 3 to 4 months. Their success fee can range from a low of 4 percent of the total amount money raised to a high of 10 percent. If they never raise the money, they never get paid any more than their retainer. Some will credit their retainer against the success fee, but that only helps if the goal is reached.

When negotiating fees with a finder, it's important to ask the following questions:

1. Exactly what fee will I be charged? Will it vary depending on how much money is raised?
2. How will the fee be paid--that is, how much in cash and how much in stock? If there's stock involved, at what price/share?
3. If someone else helps me find the same investor, how will you split your fees?
4. If the investor refuses to pay your fee, what do we do?
5. What guarantee can you provide of funding? (If the finder is willing to provide a guarantee, ask to see their checkbook or run in the opposite direction.)

If you're an entrepreneur looking for capital, take the time to ask the right questions and do your homework before hiring any finder. I can assure you that your extra work will pay off in the end.

Jim Casparie is the "Raising Money" coach at Entrepreneur.com and the founder and CEO of The Venture Alliance, a national firm based in Irvine, California, that's dedicated to getting companies funded. Elliot Reiff, COO of The Venture Alliance, contributed to this article.