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For early-stage entrepreneurs looking to obtain venture capital, an important decision to make is whether to use a finder. A finder (aka broker) is someone who offers to help an entrepreneur secure venture capital in exchange for compensation (cash and/or equity). Most finders typically charge an up-front fee and a percentage of the amount of money they "help" the entrepreneur raise and/or equity in the company. Before you decide whether to use a finder to obtain venture capital, consider the following:
1. Pursuant to the Investment Advisers Act of 1940, finders/brokers must be registered with the Securities & Exchange Commission and licensed to transact in such matters. Those who aren’t are in violation of securities regulations, so be very cautious if someone offers to make some intros and/or help you "find" venture capital money in exchange for money and/or equity.
2. Most VCs have plenty of deal flow from people they know and trust, and therefore won’t entertain a startup referred from a finder. In fact, most financing transactions require the CEO/founder(s) to represent and warrant that there aren’t any brokers involved so as to avoid potential equity encumbrances.
3. VCs invest in people so they will want to hear from you, not a finder. They’ll want to establish a rapport with you throughout the process as the financing results in a long-term partnership analogous to marriage.
4. VCs don’t want a portion of their investment going to pay a finder—it is an inefficient use of capital. They’ll want the money spent to build the business.
So when, if ever, should entrepreneurs consider using finders? Oftentimes, going through a finder can work for a very late-stage company just prior to a liquidity event.
President, Orange County Venture Group
Co-Founder and Managing Director
Okapi Venture Capital
Laguna Beach, Calif.
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