9 things to know about the management of Venture-Capital Brokers

Want to buy a new company, expand operations, acquire a business, or increase capital. Have you decided to go for the financing of risk capital than a bank loan for a multitude of reasons from the risks to the amount necessary to carry out his plan.

You know how you like to earn capital? Most people do not. Their experience is in their business, not in capital funds. Here are ways to protect yourself from vultures, deals you can not afford, and the nightmares of both.

Some quick explanations:

A venture capitalist (VC) is a person, group of persons, company or group of companies with money to invest in your business.
A VC broker represents you (or possibly a VC) and arranges the parts to create an agreement. This article is to work with the broker.

Since many brokers are ethical, because a negative slope? More than two months, two of our consulting clients nearly lost their shirts dealing with brokers. An agent has tried to quadruple dip on a VC deal by taking a commission, bringing in another broker (who needed a commission), taking the points excessive growth objectives, and the addition of interest charges in a contract to make the agreement impossible. If our Boston-based client signed with his numbers and the current (estimated) future, his decade-old business would perish.

Another agent wanted a client in Connecticut to sign a broker-exclusivity contract, forcing the customer to pay commissions on any type of funding, regardless of whether the agreement was created by the broker or not. If an SBA loan or unrelated VC came through, our client has paid $ 400,000 in commissions have not been acquired.

(With each client, the broker used four or more of the nine strategies below that would be harmful to your fulfilling your capital needs.)

Each operation has its merits and challenges. Regardless, nine general tips to consider are:

1. Do not sign exclusive contracts locking is to find their own financing. A) First, a broker has every right to protect its intellectual property by preventing to ignore him and find an agreement with one of the contacts he has introduced to you. B) On the other hand, beware of anything that prevents you from obtaining financing from other sources without going through the broker.

2. Avoid long-term cancellation clauses that are held hostage for a year or more. Sixty to ninety days is reasonable. You must be able to go forward. The goal of a mediator in the creation of a cancellation clause is to prevent long to ensure the funding with the VC you have introduced at the same time making it difficult for you to find any funding. Keep your options open and decide to give 90 days time to find new opportunities.

3. Avoid double dipping. An experienced broker has multiple compensation channels: initial Commission, the Commission on additional financing, which is obtained during the period 1 or 2 years, compensation if the business is sold during the specified time period, the rate of interest on money loaned , so read the fine print, several deals that have passed over our desks in the last 6 months have had hidden compensation clauses that would make any deal difficult to swallow was that they had signed with the broker. (Have legal representation of an expert in VC funding).

4. Knowing the type of loan you want before you begin your search, and bind your broker for a specific contract. Looking for a VC position with a share of the equity that is interested and wants to grow the company, or if you just want financing? Initially, the two may appear similar. In a VC deal, the company looking for funding thought of getting an equity partner, but the VC only wanted to reach 3.5 times their ROI in 5 years in monthly fees and interest. The final terms of the agreement: the "receiver" would get $ 2.9 million, but repay $ 6 million in 5 years. It was not the deal that was expected.

5. Remember that VC funding is all negotiation - between you, the VC, and the broker. First, never let the broker think that you have no other options. If you think you're between a rock and a hard place, you're in trouble. Second, VCs know the financing game in and out, and often they will tell you the deal is dead and do not call for weeks just to make you hungry. Sometimes the broker is in this strategy. You must be patient. Thirdly, even with contracts, the broker can only get a few chords of a year to make a great living. If you have invested four months on the project, they want the deal as one gets hurt. Then ask for concessions. They realize that they could jump up and down and scream as part of their negotiations. It is a common strategy, look at the past. In every deal, conditions change, and you must remember that commissions, fees and terms may also change.

6. Know your broker's loyalty, and make sure that you, not to the VC, or solely to the interests of its best brokers. Think of real estate. Loyalty is the agent of the seller basa with the seller: the buyer's agent is with the buyer. Work only with people you trust.

7. Be careful of brokers in disguise. Some masquerades as venture capitalists and yet have no money. What is the problem? You think you're working with an investor whose income is subject to growth and success of the transaction / business, in fact, you are working with a seller who has commissioned a cent invested in the enterprise and is only about making long connecting two parties. The only way you can never know when the deal has been written and it captures the fine-line printing for the Commission to XYZ company.

8. Use leverage a VC, if the broker is unreasonable. One of our clients have worked with a broker whose stubbornness kept on entering the business. Everyone was giving a little 'to make the package work. Our client told the VC he could not afford the deal because the broker did not participate in concessions. The VC (with greater financial leverage) wanted the agreement that has just negotiated a compromise with the broker, and everyone was happy.

9. Finally, brokers, like you are in search of their own pockets. To combat this, try to put more emphasis on bonuses based on long-term viability of funding and business growth rather than on the introduction alone. Incentives encourage brokers to build the best potential for success.

Most brokers are ethical. Do not want to take to the cleaners. Their future successes rest on their reputation for good business. But only if you get a vulture, you now have the opportunity to discover early and prevented from entering a traffic jam. And as you probably know, always consult your lawyer when you enter into a relationship with a broker or investor.

The acquisition of capital to fund future projects is exciting and daunting. Even though common sense will guide you to avoid the pitfalls and opportunities, you will not know everything about this area. Therefore, gaining outside help from experts in this area is wise no matter how many times you've done. After all, it's getting stronger than what you do best: lead and manage your organization.

David and Lorrie Goldsmith...