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Reasonable term sheet from fundraising broker in gaming industry?

Hello,

Here are the conditions of a term sheet in question:

Upfront Retainer: $10K as non-exclusive broker; $25K as exclusive broker with investment banking responsibilities.

Success-based compensation, from sources introduced by broker:
- 7% of equity capital (+warrant of 10% of corporate equity capital raised)
- 5% of debt capital
- 5% of commercial/strategic deals (joint ventures, licensing/partnering agreements)

Term: 1 year with 6-month tail (what is a 6-month tail, btw?)

Thanks in advance for any feedback!

Success-based Comp:

11 Replies

0
0
X
Entrepreneur
seems steep
Daniel Eberhard
2
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Daniel Eberhard Entrepreneur • Advisor
CEO, Koho
Those terms are fairly standard. Most brokers will be able to match so I wouldn't worry a great deal about that.

Make sure to have them generate feedback first. Prepare a short exec summary and have them put it out to their regulars and come back with feedback. Most will do this for no cost and you should be able to refine your expectations.
Also, do your DD. Check track record, placements etc and request references from previous deals. Especially if you go exclusive, this is a very important relationship.
Scott Milburn
1
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Scott Milburn Entrepreneur
Entrepreneurial Senior Executive and Attorney

The terms are a little steep but not outside the ordinary range, especially if they are going to do a fair amount of work to get solicitation docs together.

A tail generally means that any deal done within 6 months of the termination of the engagement, with someone introduced by the broker, means you pay the broker the fee as if the agreement was still in effect.

Raphael Londner
0
0
Raphael Londner Entrepreneur
Developer Advocate

Thanks Daniel and Scott, I definitely appreciateyour feedback and advice, and will pass them along to the people who asked me to review this term sheet.

Raphael Londner
0
0
Raphael Londner Entrepreneur
Developer Advocate

One last question about the 10% of warrants of equity capital raised (with a 10-year maturity). According to my calculations and based on a typical 20-30% of equity granted to the investors, that means the broker wants to be able to acquire 2 to 3% of the company at the same price as the first investors, atany point in time for 10 years (it seems clear to me that the broker expectssome liquidation event(s) during those 10 years).

Knowing that an experienced startup CEO gets max 5% of stock options with a 4-year vesting schedule, is it really reasonable to grant the broker 2-3%whenhe was only involved in a one-time funding round?

Scott Milburn
0
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Scott Milburn Entrepreneur
Entrepreneurial Senior Executive and Attorney
Raphael, you are interpreting the warrant provision correctly. As several of us said, this is nota cheap deal - 7% plus 10% warrants is at the higher end of the comp scale forcapital raiseservices. You can find people who are more in the range of 4/4 or 5/5.
Raphael Londner
0
0
Raphael Londner Entrepreneur
Developer Advocate

Scott,

Thank you much for confirming my assumptions, as well as for providing more realistic rate ranges. This is definitely going to be useful for the people I try to help (and for me as I educate myself in term sheet/VC lingo).

As a matter of fact, I've just found an interesting blog post about the financial mechanics at play: http://www.axial.net/blog/how-to-use-warrants-to-pay-investment-banking-fees/. They mention a 10% success fee split 5/5 in cash/warrants. With the same perspective, that means the actual broker's fee in my case is 17%...

Thanks again!

Patrick Muggler
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Patrick Muggler Entrepreneur
CEO & co-founder at Ambit Networks Inc
I'm trying to raise a new round of funding.
I got together with a broker and here is what he offered:
Equity capital raise
First $500K -- 10% with $25K min
Every add'l $500K will be at 1% drop with 5% min

Product license -- 18% with $750K min

Private label -- 18% with $750K min

Client unique NRE - 15% with $750K min

What do you guys think of those fees?
Please keep this info inside this forum only.
Michael Berolzheimer
0
0
Michael Berolzheimer Entrepreneur
Investor & Entrepreneur
(Patrick, great topic for CalFounders [www.calfounders.com] - hope to see you there in September.)

Founders, if you're raising a Series A or Seed round of capital, I'd highly discourage you from hiring any broker. Most professional investors will observe the way you put a round together as a reflection of your hustle and relentlessness as a founder -- if you outsource the identification of your investment partners, folks who will likely be around for 5-10 years if you're successful, then it's a hugely negative signal. When brokers reach out to us on 'deals', we flat out reject them.

If you're raising $10mm+++, then it's a different story.

Avoid brokers.... hustle... engage with founders who are well connected... be creative...

- Michael Berolzheimer
Managing Partner
Bee Partners (www.beepartners.vc)
Glenn Donovan
0
0
Glenn Donovan Advisor
Vice President of Sales (fractional)
++ Michael Berolzheimer - His points are spot on if this is angel or A round money.
Without knowing where you are in in your companies development, it's hard to say but the terms are quite high from what I've seen, as others have noted. Qualifier: I advise on sales and marketing, not raising capital but have seen a lot in my career.

I believe a "tail" is the period of time after the contract expires where you would still pay them if you raise money from their connections/referrals.
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