There are many service providers that offer to help startups with attracting investors, colloquially referred to as “finders.”
While they prefer to be called business brokers or consultants, most finders are either CPAs, insurance brokers, retired executives, or former entrepreneurs. They mostly operate in the Angel landscape, targeting deals between $100K to $2M.
Typically, they will either require a large retainer, an upfront fee, a percentage of capital raised, or some combination of all three.
The service they provide ranges from screening investors and setup meetings to developing a list of high-net-worth prospects for entrepreneurs to call on.
Unfortunately, there is a lot of controversy when working with finders. First, a sizeable majority of finders are not actually licensed as a securities broker by FINRA and are therefore in violation of federal and state security laws, whether they know it or not. Second, many finders are not capable of delivering on their promises or simply disappear as soon as you hand them a retainer check.
How This Affects You:
The issue that Startups face when working with unlicensed finders is that their legal problems can quickly spread to the startup as well. Payments to an unlawful finders can cause an entire transaction to violate securities law, giving investors a right to undo the deal as well as sue the Startup for damages.
Even if an investor does not undo the deal, these unlawful transactions can come back to haunt the company if and when the company decides to sell or go public as it may be forced to disclose the violations, thereby jeopardizing the pending deal. On the other hand, working with less than honest finders will clearly be a waste of time and money.
Advice:
Retain a good corporate securities attorney before you engage with a finder. Your securities attorney should be able to:
A) help you understand the full scope of risk of using finders in financing transactions.
B) help you verify that your potential finder is licensed with FINRA and your local state’s regulators.
C) ensure that your finder does not have any substantial complaints against them.
