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Broker Fees for Securing Investors

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I have a contact who is talking to a broker about finding equity investors for his start up pharmaceutical company. The broker is asking for 7% on the amount he raises. Based on other deals I have been involved in, this sounded high to me. I understand the funding market is tough right now. Does anyone have recent experience with finders fees for obtaining equity investors? What current rates are others seeing in the market?

Answers

Mark Stokes
Title: CFO
Company: Private
(CFO, Private) |

Do you really want to go there?

A)That is high. I typically see 5%, and it's fully negotiable. B)Will they actually be of any use? These guys are a dime a dozen and I have found myself (and heard through many others) that they rarely get results and you are back at square one. For Pete's sake don't pay them any money up front or a retainer. That's just death to your bank account. Consider carefully who they are, their reputation, do they really know money people? Will they shop your deal all over town and ruin the funding "market" for your deal? Check references big time.
C)Why are you hiring them? Be honest now! Is your company ready for funding? Have you tried and been rebuffed? If you are being told "no" by a number of investors, just trying to reach more investors through some third party will likely not help. You need to fix fundamental issues and listen closely to why you are being turned down. Fix your issues and go back out when you are ready. These fundraisers can promise the world but their delivery often does not meet their promise.
D)Have you exhausted all other avenues? Can you make other connections to funding sources through your auditor, your corporate counsel, anyone else?

Sorry, that's certainly more than you bargained for in a response, but I have done a LOT of fundraising in my many CFO stints and these fundraisers have never worked or seemed like a great idea. Good luck to you.

Leigh DeFilippis
Title: Consultant
Company: DeFilippis CFO Consulting
(Consultant, DeFilippis CFO Consulting) |

Excellent feedback. Thanks. I was only recently introduced to the company CEO. As a casual contact, the CEO has been understandably reluctant to share too many details of what he has discussed with this broker. I have advised him that fees are negotiable and he should push back. No money has changed hands yet.
I don’t know the history of their fund raising efforts. They are looking for other funding sources as well.
Very thorough response. Much appreciated.

Ken Ruotolo
Title: CFO
Company: In-between
(CFO, In-between) |

I've successfully closed numerous rounds of financing where a broker/finder introduced me to the investor. Commission rates range from 5-12% with the high end being for very risky, distressed situations. The broker also typically asks for warrant coverage in the 5-10% range.

These folks can range in quality from used car salesmen to honest, hardworking facilitators. Unless you know the broker well, perform a lot of due diligence, talk with references and get very comfortable with them before engaging. A reputable broker should not require any $$ up front. It will be apparent quickly to both sides if there is a good chance of success and the prospect of a commission should be motivation enough for the broker. Be careful to maintain an accurate list of those investors first introduced by the broker. Also make sure your attorney draws up a good agreement to cover the relationship (sometimes called a placement agent agreement or a finders agreement) which should include representations from the broker as to non-disclosure, no misstatements about the company or its prospects, the broker being properly licensed to perform the services, etc.

I'd encourage your contact to think of this as one of many potential sources of capital along with his banker, previous investors, angels, venture capital, etc.

Leigh DeFilippis
Title: Consultant
Company: DeFilippis CFO Consulting
(Consultant, DeFilippis CFO Consulting) |

Thanks Ken. I'll pass your good advice on to my contact.

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