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.
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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.
Originally published in the November 2001 issue of Entrepreneur Magazine
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