Fundraising · Equity

Should an equity owner get a venture capital funding commission?

Ben Corrado Custom Product Design with Rigado LLC

October 31st, 2013

We are on the verge of getting some angel funding for our company.  One of our founders (who owns 9% of the company) was brought onto the team to help with funding and marketing.  Now that we are on the verge of funding this founder feels that she should get a commission for finding the funding.  The rest of the team does not feel this is fair as we have been focused on things like engineering, supply chain management, sales and other non-commissioned roles.   We feel this makes the money more expense and ultimately hurts the team as a whole.  Is it common to pay founding equity owners for finding funding? Thanks!
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.

Mitchell Portnoy Healthcare Information Executive

October 31st, 2013

Ben:
Unless you have specifically discussed some type of finder's fee previously I would remind him that his 9% equity includes his "reward".  Everyone has a role to play going forward.  Should a programmer with founder equity demand payment for doing his/her job?  "Ridiculous" and "pathetic" are two words I would also use along with "no".

Aren Kaser Founder and CEO at Igor Institute

October 31st, 2013

It is not common to pay commission to equity holders for finding funding for a company they part own, its their job. Further, equity is something that is vested over time as you grow, meaning its probably worthless right now so you could give the shareholder a few bucks (literally). Furthermore, you could offer a commission for a reduction of equity as it is intrinsically an equity sell if no others are getting some of that. Finally, its a misuse of the angel funds you have just been given.

Blake Caldwell

October 31st, 2013

If he was brought on board to help with funding, then he's already received payment through his equity. He JOB is to find funding. Of course this all comes down to the wording of the contract, but he should not expect a bonus unless it's explicit in the contract, or if he found funding more than an amount explicitly set out in the contract.

He's pulling a bait and switch...I'm sure you understand that he can easily tank this deal. The issue at hand is, do you want to go into business with someone who is pulling those moves. I'd suggest pointing out the facts and telling him that he has the opportunity to play his role on the team...and if he still persists with his request (demand), you will learn that he's not a team player so cut him and the deal he comes with. 


Robert Clegg

October 31st, 2013

Reality check - funding is hard to get. You can't afford to tell this guy to take a hike. You don't want to blow the deal. You screwed up by not having this person's deal locked up explicitly in the contract. They screwed up by not being clear themselves. It's not a perfect situation. But this is your test as an entrepreneur and a leader. How do you make the best of this situation? 

I'd start by looking at what a "finder" should get in a deal like this. Usually a finder gets cash and equity. Since you are basically renegotiating this person's compensation, I'd scrap the original deal and offer the finders fee equivalent. Then you have a choice to continue or walk away from this person if it's really bothering you and the team. My sense is you need to find a way to do the deal and then part ways or at least continue at this arms length position.

note, I turned down $1M in funding once in my career in a similar situation; I stood my ground on principle. Hind sight years later puts a whole new perspective on things. Happy to talk directly to share my insight and advise.

Best,
-Robert

Rob G

October 31st, 2013

this should raise a red flag with the rest of the team and it most certainly will raise a red flag with the investors.  Tell the investors that 9% of their $$ will be going directly into the pocket of one of the 'founders' in addition to this founders's equity and see how what kind of a reaction you get...on second thought tell her that you want to call a meeting with the team and the investors and have her stand up in front of the meeting and explain why she should get a 9% commission in addition to her equity.  DO NOT actually call the meeting as there is a good chance the investors may walk when they see this kind of 'team work'. 

Anonymous

October 31st, 2013

Hi Ben, 

I'm not a fan of paying commission on helping for a raise, especially if a shareholder's job. Were it not in your job description, I'd say the same. Founders are ment to build a company, capital is needed to do so. Beyond the expenses you've mentioned, operating cash-flow will be required.

Having said that, I'd turn the conversation to a founder conversation that includes her. You mentioned she has 9%. Who's the CEO? Who are administrators? Group the team together and discuss objectives - not her payout. This can come up later in the talk. Understand that objectives, company needs... these must come before a person's individual desires. Its not just your fiduciary responsibility, but as a team you are required to do the best for the company. You don't want to completely alienate her, if possible, so play into the conversation where, if at all possible, the power of the team can reorganize her thoughts towards the common goal.

Keep this in mind: usually when one person wants money in tight startups, they are thinking one or a few of the following things:
- Their life is hard, they are underpaid, they need money
- They feel that there is a lot of money and the company spare some
- They feel that their value is clearly demonstrated and they can do it all again

Its CRUCIAL that you motivate around common goals and realistic approaches (what do you want to do, how much will it cost) and hopefully get them onboard. 

Trust me, you don't want to let the spending go. Not on expenses, not on commissions. GROW the business to sustainability. Cut the shareholder - or risk it - before compromising the good of the company and your objectives.



Robert Clegg

November 1st, 2013

Ok, show of hands: Who here has actually completed a $1M deal on the line with a similar situation? Who has closed on $4M or higher and seen compensation totally reworked at the negotiation table when the investors had a large say before the money went in? Who has done second or third rounds when every contract and covenant you had with prior investors was rewritten because you needed another $4M to keep afloat? Who has actually raised funding and had broker dealers hold up the funding or threaten to unwind deals already consummated with money in the bank because they didn't get their due - and you spent 2 months in a stare down between your irate vc's and broker dealers playing chicken with your company's future.

Your eyes will bulge and your view of the world will change dramatically when you see iron clad contracts, pages and pages of investor rights, founder promises, and everything people fought so hard for in earlier rounds be washed away or renegotiated in later rounds when big money is on the table. EVERYTHING is negotiable.

Unless you have three other bidders for this investment, you are not in the position of power. Bring in other money yourself and tell this person to take a hike. My guess is you are not in the position to easily bring in other bidders. Make a deal and get on with business. 

ps - this won't be the last time you'll have perception problems with your engineering team. As you go through the gyrations of future rounds I've mentioned above, the team will always have serious questions and misconceptions about what's happening in the board room and legal offices. Later hires may command huge salaries and compensation to get to the next level. It will look unfair. Learn to manage it now.





Anonymous

November 1st, 2013

Ben:
If you had an agreement with her to pay a commission you should.  If you didn't have an agreement you shouldn't.  More likely there was not a written agreement.  If nothing was written down then you look to understandings.  Was there reason for her to think she would get paid?  Receiving equity does not preclude someone from being paid, unless you specifically agreed the equity was in lieu of other compensation.
Can she stop the funding from closing?  If she can you may have to take a practical approach and deal with the claim.
Unfortunately, your problem with the founder is a classic example of why lawyers say to have written agreements.  I can see where both sides could have valid arguments.
EJG

Robert Clegg

October 31st, 2013

Also know that if your company really does get off the ground, compensation will all shift in later rounds of investment. As shares are added and founders are diluted, the ones the savvy investors know are really adding to the company value will be trued up or rewarded with more options. These things have a way of settling out.

One negotiation tactic is to put off the decision of compensation until the deal is done and referring it to an unbiased "compensation committee" made up of board members.  Salary determination, additional option grants, founder debt, all kinds of ways to course correct the company including signing bonuses for next level employees and option pools. I've seen founders receive a signing bonus when funded to take care of their personal debt. I've also seen and personally taken a salary cut when the company was doing poorly.

Referring to a "higher authority" is a negotiation gambit that may help you here while allowing the deal to get done.


Michelle Bonat Software engineer and entrepreneur

November 1st, 2013

no, unless that was part of the agreement upfront.