When trying to raise money, what are the going rates for finders fee? Also, who pays the fee: the investor, the entrepreneur or the company that is getting the investment?
Does it change with the size of the investment, or is it the same percentage for small and large deals?
Finder's fees can vary all over the lot, but the fee is ALWAYS paid by the company. Fees will vary depending on who the finder is (a professional intermediary, like an investment banker, vs. just an ordinary schmoe making an introduction), how much work he/she does beyond simply introduction (from helping to craft a summary selling document to soliciting various investor groups, etc.), how large the investment (more on that below) and from whom (private individual, angel investor, venture capital firm or financial institution).
An industry standard (but not necessarily THE industry standard) for fee structure is known as the Lehman formula, which is typically, 5% of the first million; 4% of the amount above $1 million up to $2 million; 3% of the amount above $2 million up to $3 million; 2% of the amount above $3 million up to $ 4 million, and 1% for all amounts above $4 million. Most typically, though, for small investments it will be a fixed fee between 2.5% and 10% of the amount invested, with the fee percentage being inversely proportional to how professional the investor as well as how directly proportional to how much of this the finder does for a living. Additionally, I’ve seen banks and venture capital firms actually negotiate those fees down – they want virtually all of their money to go to working capital.
Finally, you should negotiate the fee based on how much service the individual will provide. The more significant the service provided beyond simple introduction the higher the potential fee.
Hope this helps.
Since the investor is giving you money, the question of "who pays" is moot. You mean with money before the investment or after? Cause you know, it doesn't matter! :-)
My question is: What is the "finder" doing for you? Just setting up appointments? Cause you can hire an admin service to do that. Build your slides and pitch your company? That's better, but investors want to hear you talk.
If you're talking about an informal relationship -- like just a referral -- that should be free...
As I understand it, in the United States, anyone trying to raise investment money in return for a finder's fee, or other compensation based on delivering investment funding, must be a registered broker. Otherwise it is illegal for him to receive performance-based commissions, and he could be forced to return any commissions received. Furthermore, a company participating in such transactions could be forced to return —or at least offer to return—such investments to the investors.
I believe they could be paid a consultant's fee to introduce investors, but that fee must be paid whether or not the potential investors actually invest, and that fee may not be tied to any potential investment amount.
Officers and directors of US corporations may try to raise investment capital, but as in the case of a non-registered broker, finder, or consultant, they may not receive a finder's fee either. Consultants to corporations may be paid consulting fees based on hourly billing and reimbursement for expenses, such as travel and conference fees. In that role I believe they may try to raise investment capital or arrange joint ventures, but again they are not entitled to finder's fees or percentage-based compensation.
Water should be free, too; but wait- bottled water is not. Why? the answer is that some folks see value in paying for bottled water (or it would not sell). If the finder is some dude that was selling insurance or real estate last month (i.e. not an investment banker),
the question is really: what value do they provide? Since roughly 79 of 80 funding requests do not get funded, I would think that the (sell-side) company would at least want an MBA to help them prepare a proper business plan (not one that your buddy downloded on the web).
Most people on the planet do not work for free. Lawyers get paid, CPAs get paid, MBAs should be paid, too. We're not selling Amway here, folks. We're talking about finding capital in an economic dessert (especially duering the last few years). If a company seeks $5M, $10M $100M, they can (and should pay) afford to pay a consultant to assist them. Also, unless someone on the company payroll has a (very good) relationship with private equity Managing Directors/ VCs, it might just be a great idea to contact an investment banker. That's what they (we) do for a living. The stakes are way too high for the comnpany stakeholders to take a chance on a newbie.
For legitimate 'finders', success fees range from 2-7% of all traunches for 3 years from signing of fee letter/engagement agreement. If the company is a start-up, chances are slim to none in the current environment. Why? Private Equity/VCs are very risk averse? Why? Because it's NOT their money- it's their investor's money. If they receive 5 funding requests, one is a start-up and the other four are revenue-positive; they will fund the proven one(s) with IRR above their hurdle rate. Start-ups are too risky.
Lastly, if the company does not have at least 25% equity (cash) or doing $3-$5M EBITDA,
they are dreaming if they think that they will find invesors (rich uncles excluded).
Hope that this was helpful.
I am a Finder in Aspen, CO. I charge 1% on both sides of the deal. 1% from the recipient when the financing closes and then the investor pays me 1% of his gross earning on that investment each time he receives his earnings for the life of the investment.
It is a small price for each of them to pay to be brought together to make money. I'm not an investor emailer.
I am a matchmaker of opportunities and money. I introduce players that will get along and want to work together in the future. I only make money if my clients make money. They take all of the risk as partners. I bring them together and get paid for that only.
Thus far everyone is happy with that arrangement. Sometimes I earn more on the front end, sometimes more on the back end. That makes me happy either way as well.
Let me address both points. First, Jason, in a perfect world you're correct. It's just a referral. But it's never free. You're paying for who that individual knows. All an admin service will do is provide "yellow pages" names. What a finder does is gets you in front of someone with a checkbook. So I agree with RonGa.
Also, in the real world, no investor ever pays a finder. There are way too many companies chasing way too little capital. As for taking equity vs. cash, why would a finder want risk. He/she is simply finding money for your venture. You and the investor are taking the risk. Now, the investor may attempt to get the finder to take either less of a percentage or to take some of the capital raised in equity, but you'd be hard pressed to get it as all equity, even though that would be what the investor would prefer. They want all of their money at work.
Hope this adds to the discussion.
Some reality here, guys. First of all, the investor NEVER pays, at least not directly. Yes, it is his/her money that goes to the finder, but the company writes the check. So, for the record, if he invests $100,000, and the finder gets a $5,000 fee, the investor gets equity valued at $100,000. The company gets $95,000 of working capital.
Second, it doesn't matter how many appointments the finder sets up, if he finds you money that you could not have found yourself (aa typical reason for having an agreement with a finder), then he provided a valuable service for which he should be paid. That's way different than just connecting people, which we all do every day in our networking.
I am a seasoned serial entrepreneur who has raised well over $500MM for my own ventures and have helped other entrepreneurs raise over $1.0 billion. I am now exclusively in the business of either helping companies connect with most ideal funding sources and conversely helping private equity and VC firms gain access to companies that they would not otherwise have access to. With more than 25 years in a specific industry my contacts are high level, high quality and extremely valuable to both sides of the "deal" equation. My "finders fee" arrangement varies based on the size of the deal from a high of 5% for deals under $10MM to a low of 2% for deals over $70mm. Most of the deals I have facilitated would likely not have happened without my matchmaking know how and relationships. It has taken twenty five years of high level performance, reputation and relationship building to earn the industry "cred" to do what I do and get paid for it. The "work" I do for the fees I've earned varies greatly from just arranging for a dinner meeting between parties that would never have happened with my help to literally months of hand holding, guidance and negotiations to help effect a transaction. I never charge a retainer so the only way I get paid is if a successful deal transpires.
I don't disagree with anything Lonnie said but I would see if you can get the person to take stock instead of cash. It's hard when you're starting to have so much money going to a party that is providing a very transient service because that's cash you could be using to make the business successful. Often service providers, whether bankers or lawyers, will often take stock instead of cash in startups they believe in.
I work for a company that is in financial straights, I am the accountant. I brought in a friend and his partners to see the operation and possibly invest. They liked what they saw and, so I introduced them to the founder and the CEO. I have been involved in this in a small way working as an intermediary with the founder and my friend but not totally in all the negotiations. This will help put us back on track and the deal will potentially start out at $5M at first and going to $10M in a year. Also there is a revenue sharing deal worked out between the two. And they feel that this is just the beginning. I ask you what do you feel I should ask for as a finders fee if any. I was told 2-5% by the founder but have not heard anything from the CEO. Please respond,,,
Finders are real world 'matchmakers' for anything from relationships to a surplus of arms in a Government warehouse. Whenever you bring a buyer together with a seller or vice versa, and one or both have signed an agreement to pay a percentage of the closing deal they make with each other to you, it is a legitimate business deal of finding if you have only initiated the match and not participated in negotiation or advisement.
Real estate has 'bird dogs', millionaire singles have 'matchmakers', filmmakers have 'producers', retail companies have 'marketing and sales' departments, and everyone has something they wish they could find at exactly when they need it and so it goes for economics the world over that finders have a legitimate purpose to exist and will do so for as long as there is something to find, package, and connect.
Whether or not to pay is a matter of negotiation. People pay for information that others have found or compiled. We see that every minute of everyday folks.
As for brokers vs finders, each state and federal laws have definitions and you can find it on government sites. California has a definition of 'broker' and 'finder' on its site as indicated from the post by Ed R. You can find it if you look.
Here's one more opinion, long afterwards.... My plan, that too has proven successful and continues to be used, is quite simple. The negotiations with the Investor is simple. A fee, of an hourly billable rate is used to research potential clients. Usually I agree to "no more than 10 hours" which makes a $1250 price tag on each company I propose. This way, I get paid for the work even if unsuccessful with the investor.
Then secondly, I get paid an hourly rate to arrange/attend the meeting. All expenses are paid and an eight hour - day fee. Now for the real money. Using the Lehman formula as a guide, I have drafted a plan that allows for different levels of due diligence. Since I normally perform only the operations/technical and professional portion, approximately 1/3 of the workload. I charge 3-5% of the monies invested.
Additionally, now for the gravy, negotiate a 1-3% rate from the company on the other side.
$1250 + $1000+ $250,000 (5% of $50MM Investor) and $150,000 (3% of $50MM Company) = $402,250 PAYDAY.
If you have ever tried to find captial for a business venture, it takes an enormous amount of energy, strategic hunting, and luck. If you think you can make a couple phone calls and find 50 grand, a hundred grand, or twenty million dollars, it's actually a very complex and arduous task. I have a couple small investors right now for a new project, and everyone who wants to invest has known me over 12 years.
People who have connections have trust. That does not come overnight.