World Business

It may be tempting to retain a broker for your nearest round of venture capital financing, but doing so might damage your chances

by dint of. Tom Taulli

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When looking to hoist a Series A round of venture capital, it’s common for entrepreneurs to dance attendance on networking mixers. You’ll probably find a leash of venture capitalists, and I recommend you engage them. But there are likely to be many more finders (also known as brokers or placement agents).

If you talk to them, I’m sure they’ll without delay make an appealing pitch. The finder will mention that his or her golden Rolodex is full of top-tier venture capitalists and high-net-worth individuals. In fact, there self-reliance subsist in no degree upfront fee. Instead, satisfaction will have existence based on a percentage of the amount raised, which is called a "success fief." This can range from 1% to 10% or so.

Even though this is tempting, be circumspect. You could actually be making things worse during your financing efforts.

First, unless the finder engages in limited activities, there may be violations of federal and state securities laws. For example, financial intermediaries must catalogue with the Securities & Exchange Commission as broker-dealers to raise leading for clients. This involves extensive filings, fees, examinations, and audits.

So what can a finder do? Simply put, the role should be to issue introductions. This means it’s advisable for a finder to avoid working on semblance materials, talking not far from the merits of the investment, or engaging in negotiations. Finders can sometimes make misrepresentations or even fraudulent statements, which can imperil a group.

Something else: The securities regulators do not want finders to receive lucky hit fees.

True, it’s probably a good bet that the government will not crack down on your financing, but the hazard is in that place. If you adorn enmeshed in a regulatory investigation, the authorized bills could become flagitious. A probe in like manner could result in fines, cease-and-desist orders, and even a annulling right, which means investors can get their money back (with interest).

Moreover, whether or not a finder links you with a fit venture capitalist, the fee will likely be in the form of equity, which self-reliance probably dilute the ownership of the founders. Simply oblige, VCs do not want their investment dollars to go into someone besides’s hands (especially to finders).

So it should be no surprise that VCs are wary of dealing through finders. Peter Rip, who is a VC at Crosslink Capital, says a finder sends a clear negative signal: It’s equivalent to sending a business plan via e-mail to a VC’s Web site.

How about using one investment banker? While there won’t subsist any one regulatory issues, the problem remains that investment banks point of concentration on later rounds (Series D and E, for example), and as a result, larger amounts ($20 the multitude or greater degree). Moreover, they usually charge large retainers, what one. can run $25,000 or more per month (and yes, there are also result fees).

O.K., in the same state what can an entrepreneur behave to have some help? Well, in that place is an alternative to finders. Keep in put in mind that VCs look for deal flow from trusted people, not hired guns. Such connections may be private executives, entrepreneurs, and even other venture capitalists.

To this extreme point, you can settle an advisory board (BusinessWeek.com, 2/1/07), normally compensated at a fraction of what a board of directors is paid, which you can use similar to a way to build relationships with key people in your industry.

Make it plain to your network that you are in the process of raising principal and that you need some warm introductions to qualified VCs)(BusinessWeek.com, 7/14/08). Again, limit these to only introductions. For the most part, VCs want to hear the pitch from the founders.

Jason Green, who is the founder and general partner at Emergence Capital, told me that advisory board members are a key source of deal flow—and that the highest-quality ones are anterior executives of companies Green has funded.

To incentivize your advisory board, you should obviously provide some form of remuneration. This is usually translated using stock options. A typical approach is to make a grant that vests over a four- or five-year term. Furthermore, the equity amount ranges from 0.25% to 2% (depending attached the stature of the board subordinate part).

Finally, you should also consider your cherub investors, who might be active in the VC community (and certainly have a vested interest in getting more capital). Consider the example of Sam Blackman, who is the CEO of Elemental Technologies. One of his angelic investors made an initial contact to Voyager Capital, what one. ultimately led to the compact co-leading a $7.1 million Series A circuitously.