| You want to buy a new company, expand | | | | Initially, the two can appear similar. In one VC deal, |
| operations, acquire a business, or raise capital. You've | | | | the company looking for funding thought they were |
| decided to go for venture capital funding versus a | | | | getting an equity partner, but the VC only wanted to |
| bank loan for a multitude of reasons from the risks | | | | achieve 3.5 times their ROI in 5 years in monthly fees |
| involved to the amount you need to carry out your | | | | and interest. The final terms of the agreement: the |
| plan. | | | | "receiver" would get $2.9 million, but would pay back |
| Do you know as much as you'd like about gaining | | | | $6 million in 5 years. It was not the deal he expected. |
| capital? Most people don't. Their expertise is in their | | | | 5. Remember that VC funding is all |
| business, not in capital funding. Here are ways to | | | | negotiation--between you, the VC, and the broker. |
| protect yourself from vultures, deals you can't | | | | First, never let the broker think that you don't have |
| afford, and the nightmares of both. | | | | other options. If they think you're between a rock |
| Some quick explanations: | | | | and a hard place, you're in trouble. Second, VCs know |
| A venture capitalist (VC) is a person, group of | | | | the financing game in and out, and often they will tell |
| people, company, or group of companies with money | | | | you the deal is dead and not call back for weeks just |
| to invest in your business. | | | | to get you hungry. Sometimes the broker is in on this |
| A VC broker represents you (or possibly a VC) and | | | | strategy. You must be patient. Third, even with |
| arranges the parties to create a deal. This article is | | | | contracts, the broker may only secure a few deals a |
| about working with the broker. | | | | year to make a great living. If they've invested four |
| Since many brokers are ethical, why such a negative | | | | months on the project, they want the deal as badly |
| slant? Over two months, two of our consulting clients | | | | a you do. Then ask for concessions. Realize they |
| nearly lost their shirts dealing with brokers. One | | | | might jump up and down and scream as part of their |
| broker tried to quadruple dip on a VC deal by taking | | | | negotiations. It's a common strategy; look past it. In |
| a commission, bringing in another broker (who needed | | | | every deal, conditions change, and you must |
| a commission), taking excessive points on growth | | | | remember that commissions, fees, and terms can |
| targets, and adding interest fees into a contract | | | | also change. |
| making the deal impossible. Had our Boston-based | | | | 6. Know your broker's loyalty, and make sure it's to |
| client signed with his current and (estimated) future | | | | you, not to the VC, or solely to the broker's own |
| numbers, his decade-old business would have | | | | best interests. Think of real estate. The seller's |
| perished. | | | | agent's loyalty rests with the seller: the buyer's |
| Another broker wanted a client in Connecticut to sign | | | | agent's with the buyer. Work only with people you |
| a broker-exclusivity contract, forcing our client to pay | | | | trust. |
| commissions on any type of financing, regardless of | | | | 7. Be careful of brokers in disguise. Some mask |
| whether the deal originated through the broker or | | | | themselves as venture capitalists and yet have no |
| not. If an SBA loan or unrelated VC came through, | | | | money. What's the problem? You think you're |
| our client would pay $400,000 in unearned | | | | working with an investor whose income is contingent |
| commissions. | | | | upon the growth and success of the deal/business; in |
| (With each client, the broker used four or more of | | | | fact, you're working with a commissioned salesperson |
| the nine strategies below that would be harmful to | | | | who hasn't invested a cent in the venture and only |
| your fulfilling your capital needs.) | | | | stands to gain as long as he links two parties. The |
| Every deal has its own merits and challenges. | | | | only way you may ever know is when the deal is |
| Regardless, nine general tips to consider are: | | | | being written up and you catch the fine-print line for |
| 1. Don't sign exclusivity contracts barring you from | | | | commission to XYZ firm. |
| finding your own funding. A) On one hand, a broker | | | | 8. Use a VC's leverage if the broker is unreasonable. |
| has every right to protect his intellectual property by | | | | One of our clients worked with a broker whose |
| preventing you from bypassing him and striking a deal | | | | stubbornness kept on getting in the way of the deal. |
| with one of the contacts he's introduced you to. B) | | | | Everyone was giving in a little to make the package |
| On the other hand, beware of anything preventing | | | | work. Our client told the VC he couldn't afford the |
| you from gaining funding from any other source | | | | deal, because the broker was not participating in the |
| without going through the broker. | | | | concessions. The VC (with greater financial leverage) |
| 2. Avoid long-term cancellation clauses that hold you | | | | wanted the deal enough that he negotiated a |
| hostage for a year or more. Sixty to ninety days is | | | | compromise with the broker, and everyone was |
| reasonable. You've got to be able to move on. A | | | | happy. |
| broker's objective in creating a long cancellation clause | | | | 9. Lastly, brokers, like you, are looking out for their |
| is to prevent you from securing funding with the VC | | | | own pockets. To combat this, try to put more |
| they've introduced you to while at the same time | | | | emphasis on bonuses based on the long-term viability |
| making it difficult for you to find any funding. Keep | | | | of the funding and the growth of the business rather |
| your options open and agree to 90 days giving you | | | | than solely on the introduction. Incentives encourage |
| time to find new opportunities. | | | | brokers to build the most potentially successful deals. |
| 3. Prevent double dipping. A savvy broker has multiple | | | | Most brokers are ethical. They don't want to take |
| compensation channels: initial commission, commission | | | | you to the cleaners. Their future successes rest on |
| on additional funding you get during a 1 or 2-year | | | | their reputations for making good deals. But just in |
| term, compensation if the business is sold during | | | | case you get a vulture, you now have ways to find |
| specified time frame, percentage of interest on | | | | out early and prevent yourself from getting in a jam. |
| monies lent, etc. Read fine print, several deals that | | | | And as you probably know, always consult with your |
| have passed over our desks in the past 6 months | | | | attorney when entering into a relationship with a |
| have had hidden compensation clauses that would | | | | broker or investor. |
| have made any deal difficult to swallow had they had | | | | Acquiring capital to fund future projects is exciting |
| signed with the broker. (Have legal representation | | | | and daunting. Although common sense will guide you |
| from an expert in VC funding.) | | | | to avoid pitfalls and seize opportunities, you won't |
| 4. Know the type of funding you want before you | | | | know everything about this area. Therefore, gaining |
| start searching, and bind your broker to the specifics | | | | outside help from experts in this area is wise no |
| with a contract. Looking for a VC with an equity | | | | matter how many times you've done it. After all, |
| position who wants shares and is interested in | | | | you're strongest doing what you do best: leading and |
| growing the firm, or do you just want financing? | | | | managing your organization. |