Perils of Using a Finder to Raise Capital for Your Emerging Business
Business financing is very difficult to find these days. As we all know, banks that only a couple of years ago were using the “mirror” test to see if your business qualified for a loan (i.e., if you fog the mirror you get the loan), are now refusing to loan to even the highest quality businesses.
The investor market has also dried up. Locally angel investor groups have disbanded and venture capital groups are having difficulty raising new funds and cashing out of prior investments.
This financial straight jacket often causes business owners to become desperate to raise money to keep businesses afloat or, if they’re well positioned, to grow.
Like magic, though, there is always one group of people who promise they can raise money for you - finders. They claim to have done it before and say they’ll do it for you - if you pay them 10% or 15% of what they raise.
The bottom line: don’t do it.
Unless the finder is a registered broker dealer, you’re prohibited by law from paying a commission. Paying an unlicensed person a commission for raising capital could give your investors the right to demand their money back – even years later. It’ll also cause problems if you want to raise money in the future.
And it doesn’t have to be called “commission” to be a commission. Anytime money is paid, or compensation increases, because the company raised capital, then you’re paying a commission.
Furthermore, no legitimate investor is willing to have 10% or 15% of their money go to pay the commission. They want it working in your business.
Finally, in 16 years practicing corporate law I’ve never seen a finder actually raise money. Their game is to have your business enter a consulting agreement where they’re given stock, an officer or board position and, perhaps, up-front cash. Then, when things don’t work out the finder still owns the stock and blames you for their inability to raise the money so you can’t get it back for breach of contract.
Don’t let these difficult financial times force you into a no-win situation. Unlicensed finders won’t get you the money you need and could put your entire business at risk.