Fundraising · Fundraising broker

Equity as finder's fee?

Greg Lipinski Patent Examiner at USPTO

April 14th, 2016

For startups looking to work with registered broker-dealers to raise funds, I know the Lehman formula (5% for the first $1 million raised) is common. Unfortunately, not that everyone with big networks has broker-dealer licenses. I've heard offering equity for an amount raised has less legal hassles, but what's an appropriate amount of equity to offer? Would it make sense to apply the Lehman formula but provide the amount of equity that'd be equivalent to the cash that broker-dealer's would normally make?

Also, just curious, are there are any advisors in this network who are open to equity deals like this? The startup I've been advising recently turned down an investment offer from a strategic partner because there were too many strings attached (as their lawyer, I believe it was the right move). They're now looking to raise from other sources to hammer out a more equitable agreement with the strategic partner in the near future.
More than 65% of new companies fail because they lack funding. In this course, you’ll learn common fundraising mistakes, how to nail an elevator pitch, how to craft a killer pitch deck, where to source investments from, and all about term sheets and convertible notes.

Martin Omansky Independent Venture Capital & Private Equity Professional

April 15th, 2016

It is unlawful to pay or receive finders fees of any kind, including equity or options, to anyone who is raising money and who is not a broker/dealer or registered representative. That said, many people do this anyway, because it is difficult to enforce. Recent legislation says that companies may not pay such fees, which makes enforcement easier. The real risk, however, is if the company is up for sale. The transaction could be delayed or canceled because a due diligence review discovers such a payment was made. Outside the US, however, such intermediary services are legal in many jurisdictions. Sent from my iPhone

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

April 14th, 2016

@Greg Lipinski, Lehman is generally accepted because it does not obligate the investor to have a partner whose contribution was to 'find an investor'. If there is strategic value for the 'finder' to be a partner then that should be a separate structure which may or may not include the investor. 

Karen Rands Compassionate Capitalist & Venture Catalyst

April 15th, 2016

Martin Omansky is right on.  The problem is that licensed broker dealers don't want to waste time on small deals, particularly when they need to spread it out to multiple agents to sell the equity to their investors.  And there is a level of due diligence required to ensure there is no fraud associated with the deal and that it is viable if being recommended to investors.  Someone needs to incur that expense.  If they bypass that step to take it directly to their investor pool just to be compensated by equity and the hope  that SOMEDAY that investment of their time and money (they are paying for the outreach in some manner, even if soft dollars) may turn into revenue IF the company actually gets all the way to a positive liquidity point (1 in 10), they risk losing their license or facing stiff fines from FINRA if the deal loses money---fails, bankrupt, down round, and the investors they put into the deal lose their money.   When you look at it from their perspective..... why take the risk?   Good news, is there are new programs as a result of the JOBS act that enable the entrepreneur to identify and find investors directly, by passing finders and BDs, if they are willing to do the work necessary to reach 20x the amount of investors they need for their deal.   
So Matthewy Maly, if you were to use CrowdFunding or Intrastate Capital Solicitation provisions now available in 20 states, and you were to raise $150K in $10,000 increments... 15 investors, so you would need to have a strategy that would generate enough interest to have 300 potential investors read your exec summary, watch your video, seriously consider your deal---and you have done the research to know all the elements needed to show how you will generate profit and get to cashflow positive with the $150K.  If it is that good, you should be willing to put in your own sweat equity to build that campaign, get someone to make a killer video for you for equity, and form the alliances with champions that will help promote your offering because they simply want to help you succeed.... you can take them to dinner some time.   

Martin Omansky Independent Venture Capital & Private Equity Professional

April 15th, 2016

There are many boilerplate contracts on the Internet, but I would not use them because every arrangement is different. If I were you, I would go to a securities attorney to draft an agreement - especially if securities or options are involved. If you need a recommendation for a good, not very expensive lawyer, I can do so. Of course, this recommendation depends on your geography. Sent from my iPhone

Martin Omansky Independent Venture Capital & Private Equity Professional

April 15th, 2016

If you don't have the funds to pay a lawyer, you need to find a financial partner who does have funds. One rarely can succeed in business without proper seed capital. Sent from my iPhone

Matthew Maly

April 15th, 2016

I have been looking for a financial partner for the last one and a half years.Have not found one yet. And I can tell you why. Every potential financial partner says, "Oh, you have not got a tech cofounder." 

Tom Duffy

April 15th, 2016

interesting conversation

Bruce Jackson M&A; private placements; builder of management and financial infrastructures for young companies

April 15th, 2016

to Martin Omansky.

I offered my comments to this audience to illuminate a complicated issue that is understood by far too few people... and intentionally ignored by others. I am not making an "argument," but rather sharing on the basis of decades of experience with this issue (including having spent much money on securities lawyers in this area; and I have run a B/D for decades). And I am definitely NOT giving advice. I do not wish to engage in a debate, but I must say that your last post misleads the uninitiated.


On this issue the securities regulations are framed in terms of the "sale of securities." Readers can read the SEC website and the '33 and '34 Acts for details on what that defined phrase means. If one is not engaged in the sale of securities, one is not in violation, technically or otherwise.

Andrew Lockley

April 15th, 2016

I'd look to use equity for deeper and more lasting relationships, not for mere transactions

Martin Omansky Independent Venture Capital & Private Equity Professional

April 15th, 2016

Bruce: I understand your argument. The reality, of course, is that making introductions and either receiving fees by unregistered persons or paying fees for such introductions is technically a violation but not usually enforced by the SEC because of the inherent difficulties involved. I urge issuers to take the most conservative approach, because unexpected stuff sometimes happens. Your advice might be different.