Commission · Fundraising broker

How much commission should I pay for funds raised?

Alex McLintock Techie, Software Dev, Contractor, Big Data

June 19th, 2017

In the sales industry it is quite acceptable to pay no salary, but commission only on making a sale. I have someone willing to do the same for fundraising for my startup. This could be quite good for us. I don't have much experience of fund raising so having someone else with good contacts do it might get over an important hurdle.


However I am confused about some of the details. Should we agree a straight forward percentage of the money raised? What should that percentage be? Is there a common value?

When should it be paid? What if the money raised is a convertible note - ie one where I don't actually have to get the money until I need it?


Any tips on what has worked for you?


Thanks


Chicke Fitzgerald

June 20th, 2017

There are strict SEC rules on who can accept a commission on fund raising. Make sure that you are aware of those rules and ensure that the person that is offering to help you has the right licenses.

Krunoslav Gašpert Owner at Pullus Consulting

June 19th, 2017

Hi Alex, fundraising fee depends on numerous factors that should be agreed with the consultant that is helping you in the process. From the minimal and maximal amount that should be raised, time frame, investment source, is this one time job for the consultant or fundraising fee is only one part of the fee that consultant will generate from the business relationship with your company...If you want send me more information about your project and required investment and I will be able to provide you more detailed information.

Paul Garcia marketing exec & business advisor

June 20th, 2017

The high level answer is as little as possible. When you're raising funds, you have to disclose the amount you're paying for fundraising, and numbers more than a couple percentage start to make the investors itchy. It feels like paying an auction premium. I understand the value of a successful fundraising expert. To an investor though, this almost feels like skimming, their money isn't doing any work when it goes to the fundraiser, and it makes it that much harder for you to pay back.


Keep it in the neighborhood of real estate commissions (2.5-4%) and you'll find far fewer objections from investors. But you may also find that fundraisers aren't willing to work for so little with nothing up-front. You may need to provide your fundraiser different or a combination of incentives. For example, you may offer them a draw up to a certain figure, but they must deliver x-number of introductions within x-timeframe for that cash, and the balance of the overall commission is paid once the funds are deposited in your bank.


Fundraising is certainly one of the legitimate lines of your 3-year budget. Just make sure it doesn't draw ugly attention, in the way that deferred salary figures also draw negative attention.

Dane Madsen Organizational and Operational Strategy Consultant

May 15th, 2020

It is not uncommon, what is rare is success.


First, the controls on who can get a commission for sale of securities is on the receiver of the funds, not you or the investors. However, you will need your lawyer to draft the agreement to make your they have represented they are eligible (if they are) to be paid commission, and indemnify you from all their actions.


Second, as @PaulGarcia points out, pay them the least you can, but understand you get what you pay for. No retainer consultants will want a higher success fee (usually cash and warrants/shares) equal to about 10% of the amount raised - not the company. I have seen this total 20% in the past, but that is 15 year old thinking.


Third and most crucial: This does not get you out of fund raising; it is actually an education in fundraising. Pay close attention to the process, make sure the presentations are accurate, but (a risk with your technical background) not chloroform in print (there are well developed pitch processes - examples of decks and the like), and how to tell the potential investors you meet what/how/why. The intermediary is not the expert on your business. They are only responsible to find real investors, make introductions, set appointments, come to the meetings, accumulate feedback and all that process - you still must sell the company to them.