Fundraising broker

Reasonable term sheet from fundraising broker in gaming industry?

Anonymous

January 28th, 2014

Hello,

Here are the conditions of a term sheet in question:

Upfront Retainer: $10K as non-exclusive broker; $25K as exclusive broker with investment banking responsibilities.

Success-based compensation, from sources introduced by broker:
- 7% of equity capital (+warrant of 10% of corporate equity capital raised)
- 5% of debt capital
- 5% of commercial/strategic deals (joint ventures, licensing/partnering agreements)

Term: 1 year with 6-month tail (what is a 6-month tail, btw?)

Thanks in advance for any feedback!

Success-based Comp:

Daniel Eberhard CEO, Koho

January 28th, 2014

Those terms are fairly standard. Most brokers will be able to match so I wouldn't worry a great deal about that.

Make sure to have them generate feedback first. Prepare a short exec summary and have them put it out to their regulars and come back with feedback. Most will do this for no cost and you should be able to refine your expectations. 
 
Also, do your DD. Check track record, placements etc and request references from previous deals. Especially if you go exclusive, this is a very important relationship. 

Scott Milburn Entrepreneurial Senior Executive and Attorney

January 28th, 2014

The terms are a little steep but not outside the ordinary range, especially if they are going to do a fair amount of work to get solicitation docs together.

A tail generally means that any deal done within 6 months of the termination of the engagement, with someone introduced by the broker, means you pay the broker the fee as if the agreement was still in effect.

Diane Bernard Chief Digital Marketing & Growth Officer For Hire, CEO, Virtual CMO for Technology, Healthcare, Pharmaceutical, Consumer

February 6th, 2016

Also, Can you recommend VCs that are looking to fund female executive led businesses.  Thanks for any input. 

Anonymous

January 28th, 2014

seems steep 

Anonymous

January 28th, 2014

Thanks Daniel and Scott, I definitely appreciate your feedback and advice, and will pass them along to the people who asked me to review this term sheet.

Anonymous

January 28th, 2014

One last question about the 10% of warrants of equity capital raised (with a 10-year maturity). According to my calculations and based on a typical 20-30% of equity granted to the investors, that means the broker wants to be able to acquire 2 to 3% of the company at the same price as the first investors, at any point in time for 10 years (it seems clear to me that the broker expects some liquidation event(s) during those 10 years).

Knowing that an experienced startup CEO gets max 5% of stock options with a 4-year vesting schedule, is it really reasonable to grant the broker 2-3% when he was only involved in a one-time funding round?

Scott Milburn Entrepreneurial Senior Executive and Attorney

January 28th, 2014

Raphael, you are interpreting the warrant provision correctly. As several of us said, this is not a cheap deal - 7%  plus 10% warrants is at the higher end of the comp scale for capital raise services. You can find people who are more in the range of 4/4 or 5/5.

Anonymous

January 29th, 2014

Scott,

Thank you much for confirming my assumptions, as well as for providing more realistic rate ranges. This is definitely going to be useful for the people I try to help (and for me as I educate myself in term sheet/VC lingo).

As a matter of fact, I've just found an interesting blog post about the financial mechanics at play: http://www.axial.net/blog/how-to-use-warrants-to-pay-investment-banking-fees/ . They mention a 10% success fee split 5/5 in cash/warrants. With the same perspective, that means the actual broker's fee in my case is 17%...

Thanks again!

Patrick Muggler

August 12th, 2015

I'm trying to raise a new round of funding.
I got together with a broker and here is what he offered:
  Equity capital raise
  First $500K -- 10% with $25K min
  Every add’l $500K will be at 1% drop with 5% min

  Product license -- 18% with $750K min

  Private label -- 18% with $750K min

  Client unique NRE - 15% with $750K min 

What do you guys think of those fees?
Please keep this info inside this forum only.

Michael Berolzheimer Investor & Entrepreneur

August 12th, 2015

(Patrick, great topic for CalFounders [www.calfounders.com] - hope to see you there in September.)

Founders, if you're raising a Series A or Seed round of capital, I'd highly discourage you from hiring any broker.   Most professional investors will observe the way you put a round together as a reflection of your hustle and relentlessness as a founder -- if you outsource the identification of your investment partners, folks who will likely be around for 5-10 years if you're successful, then it's a hugely negative signal.  When brokers reach out to us on 'deals', we flat out reject them.  

If you're raising $10mm+++, then it's a different story.  

Avoid brokers.... hustle... engage with founders who are well connected...  be creative... 

 - Michael Berolzheimer
Managing Partner
Bee Partners (www.beepartners.vc)