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Equity as finder's fee?

For startups looking to work with registered broker-dealers to raise funds, I know the Lehman formula (5% for the first $1 million raised) is common. Unfortunately, not that everyone with big networks has broker-dealer licenses. I've heard offering equity for an amount raised has less legal hassles, but what's an appropriate amount of equity to offer? Would it make sense to apply the Lehman formula but provide the amount of equity that'd be equivalent to the cash that broker-dealer's would normally make?

Also, just curious, are there are any advisors in this network who are open to equity deals like this? The startup I've been advising recently turned down an investment offer from a strategic partner because there were too many strings attached (as their lawyer, I believe it was the right move). They're now looking to raise from other sources to hammer out a more equitable agreement with the strategic partner in the near future.

23 Replies

Thomas J. Kaled
3
0
Thomas J. Kaled Advisor
Business Development Consultant @ thomas.kaled@gmail.com
@Greg Lipinski, Lehman is generally accepted because it does not obligate the investor to have a partner whose contribution was to 'find an investor'. If there is strategic value for the 'finder' to be a partner then that should be a separate structure which may or may not include the investor.
Matthew Maly
0
1
Matthew Maly Entrepreneur
Founder at PSYCLUE
I would gladly give equity to someone who finds an investor for my projecthttp://tinyurl.com/PsyClue-Deck316, and I only need $150K

Andrew Lockley
0
0
Andrew Lockley Advisor
Investor and strategy consultant
I'd look to use equity for deeper and more lasting relationships, not for mere transactions
Matthew Maly
0
2
Matthew Maly Entrepreneur
Founder at PSYCLUE
That would great, but first I need to turn my idea into reality. If it is just an idea, what is there to discuss? If it is a working prototype, and users love it, as they will, it is an entirely different matter.
Martin Omansky
6
0
Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
It is unlawful to pay or receive finders fees of any kind, including equity or options, to anyone who is raising money and who is not a broker/dealer or registered representative. That said, many people do this anyway, because it is difficult to enforce. Recent legislation says that companies may not pay such fees, which makes enforcement easier. The real risk, however, is if the company is up for sale. The transaction could be delayed or canceled because a due diligence review discovers such a payment was made. Outside the US, however, such intermediary services are legal in many jurisdictions. Sent from my iPhone
Thomas Duffy
0
0
Thomas Duffy Advisor
Telehealth365
interesting conversation
Matthew Maly
0
0
Matthew Maly Entrepreneur
Founder at PSYCLUE
Thanks!
Karen Rands
3
1
Karen Rands Advisor
Founder, Managing Director at Kugarand Capital Holdings
Martin Omansky is right on. The problem is that licensed broker dealers don't want to waste time on small deals, particularly when they need to spread it out to multiple agents to sell the equity to their investors. And there is a level of due diligence required to ensure there is no fraud associated with the deal and that it is viable if being recommended to investors. Someone needs to incur that expense. If they bypass that step to take it directly to their investor pool just to be compensated by equity and the hope that SOMEDAY that investment of their time and money (they are paying for the outreach in some manner, even if soft dollars) may turn into revenue IF the company actually gets all the way to a positive liquidity point (1 in 10), they risk losing their license or facing stiff fines from FINRA if the deal loses money---fails, bankrupt, down round, and the investors they put into the deal lose their money. When you look at it from their perspective..... why take the risk? Good news, is there are new programs as a result of the JOBS act that enable the entrepreneur to identify and find investors directly, by passing finders and BDs, if they are willing to do the work necessary to reach 20x the amount of investors they need for their deal.
So Matthewy Maly, if you were to use CrowdFunding or Intrastate Capital Solicitation provisions now available in 20 states, and you were to raise $150K in $10,000 increments... 15 investors, so you would need to have a strategy that would generate enough interest to have 300 potential investors read your exec summary, watch your video, seriously consider your deal---and you have done the research to know all the elements needed to show how you will generate profit and get to cashflow positive with the $150K. If it is that good, you should be willing to put in your own sweat equity to build that campaign, get someone to make a killer video for you for equity, and form the alliances with champions that will help promote your offering because they simply want to help you succeed.... you can take them to dinner some time.
Matthew Maly
0
0
Matthew Maly Entrepreneur
Founder at PSYCLUE
Martin Omansky Where can I get a boilerplate agreement between the Principal Founder (the Idea Founder, with an enormous stake in the project) and a Technical cofounder (an IOS developer, doing something important and valuable, but essentually routine and not very time consuming). The agreement must include stages and milestones that would lead to an increase of theTechnical cofounder's stake.
Martin Omansky
1
0
Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
There are many boilerplate contracts on the Internet, but I would not use them because every arrangement is different. If I were you, I would go to a securities attorney to draft an agreement - especially if securities or options are involved. If you need a recommendation for a good, not very expensive lawyer, I can do so. Of course, this recommendation depends on your geography. Sent from my iPhone
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