Best Negotiating Tips for Compensating Small Business Fundraising Agents

Insider's tips and strategies for hiring, managing and compensating business brokers and fundraising agents

Q.  What is a fair percentage of a startup company to offer someone who will find capital to finance initial manufacturing?  I've spent all my money on patent filings so I'm relying entirely on this person to come up with funds to get my product to market.  What else should I know?

A.   Anyone who knows me understands that I am quite passionate about baseball.  As the season progresses and teams compete for the playoffs, we often see more players go for higher risk, potentially higher reward plays.  The problem is players often strike out at the plate when they swing for the fences.

Unfortunately I see too many entrepreneurs become dependent on a single strategy or person to deliver a do or die result for their companies.  Here is where complacency can be costly.  

Before you negotiate a final deal with any fundraising agent, there are a few issues to consider.  First, are you hiring the most qualified fundraising help or the one that happens to be around at the moment? 

I would not hire any agent on an exclusive basis who has not closed a similar amount transaction preferably within your industry with venture funds or individual investors within the last 12 months.  Check references with care. 

Remember, who you hire to pitch your "story" demonstrates to potential investors the caliber of your decision making.  No matter how good your business plan, if you hire a dud to be the first voice of your company, you are not likely to get funding.

A second consideration is deal readiness.  This means having a credible business plan, financial projections and PowerPoint slide deck to complement presentations to investors in place.  I also recommend to startup entrepreneurs that they project the costs required to reach certain interim operating milestones, such as cash flow breakeven. 

The risk of running out to solicit investors without being prepared is very much like walking out into a heavy rain storm without an umbrella.  Pretty soon you look foolish and all wet and washed up.   Investors don't have the patience to let entrepreneurs pitch them over and over again. 

Now, about agent compensation.   Fundraising agents, often called "brokers," "intermediaries" or "investment bankers" often receive a compensation package of cash and equity (typically warrants) for fundraising assistance.   Better connected intermediaries rarely work "for nothing" as they say during the solicitation period.  These professionals require some sort of non-refundable monthly cash retainer, which can be offset against the final "success fee" calculation.

Typically, the fees for raising money for seed and early-stage companies are approximately "5 and 5", meaning 5% of the cash raised plus a two to five-year warrant that may allow the intermediary to buy up to 5% of the company's equity. Desperate companies pay more.

The fees for fundraisings over say $10 million are more negotiable.  It's also not uncommon for intermediaries to agree to the Lehman Formula which awards 5% of the first million raised; 4% of the second million raised, etc.  Notice that equity based compensation is usually "on the back end" and not awarded at the time you sign an agent representation agreement.

The real deal about successful fundraising is agents don't raise money for companies, company founders do.  Only you have the authority and technical knowledge to persuade investors to back your business. Agents are best used to quickly schedule investor meetings, coach presentations and help you negotiate a fair deal.  However, if you expect them to do "the entire job" then you will strike out at the plate.

Write to Susan Schreter at susan@takecommand.org for great funding tips and resources for entrepreneurs during the first 24 months in business.

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