Five Things to Remember about Finders’ Agreements

Do you need to raise capital for your company? If you haven’t yet, you will probably soon be introduced to yet another link in the venture capital world food chain: “finders”.

Finders usually come with the promise of saving you time and introducing you and your company to fast, available cash. While in some cases that is actually true, more than a few of the finders’ agreement which I have encountered didn’t yield any investment at the end of the day. This is not to say that there aren’t any good middlemen out there, but you have to be on your guard to weed out the ones who don’t have good intentions. Here are valuable tips for actions to take before you enter into any agreement with a finder:

  1. Do your homework
    As with investors, finders also have reputations, successes and failures. Ask for references and follow up on them. Most of the finders can disclose in advance to which investors you are going to be introduced, so get the scoop and make sure you’re really interested in them. Try to avoid a situation where you sign multiple agreements which don’t yield value.
  1. Limit your investors list
    Add a list of “approved investors” to your agreement. You need to have this list in place as the finder will usually demand that you not approach “his” investors independently. Make sure you approve every investor’s name who goes into this appended list, and that the exclusivity and other rights and restrictions in the finder’s agreement (finder’s compensation included) applies only with respect to those investors who you agreed to include.
  1. Limit the finder’s exclusivity
    As mentioned above, the finder will demand that you shall not approach “his” investors independently. There are at least two acceptable ways to restrict this demand:

    • Make sure of the date on which the approved investor was added to your appended approved investors list. An approved investor should cease to be one after a certain agreed period.
    • If you get introduced to an approved investor (i.e. an investor in your appended list) by a third party – the limitations of the finder’s agreement shouldn’t apply.
  1. Legal restrictions
    In certain jurisdictions, (the US for example) finder services may be considered as broker or dealer activity, which is prohibited without proper registration, and which is subject to a set of regulations and rules. A finder’s work may be considered as solicitation of investors to enter into securities transactions and the company’s (or even your) activities in this regard may be considered as “aiding and abetting”. Make sure your legal team is in the picture.
  1. Thresholds
    Take a stand: Make sure you limit the finder’s maximum compensation for investments made and even consider gradual compensation, to incentivize your finder to bring a better deal to the table. Bear in mind that it’s often than not that investors eventually resist the finder’s compensation (even if the finder introduced the investors to the company), so you want to make sure the finder’s compensation is realistic and that it will not “block” an investment for you. If your compensation is in equity, make sure you can convert to cash, or that options with fair value are given instead. Investors often don’t like giving away equity to finders.