How to Work with a Finder for Your Start-up: Key Points to Remember
If you are a start-up founder, then there is a good chance you will need to work with a finder at some point. A finder is someone who connects start-ups with investors. The correct finder can be an invaluable resource to enable you to succeed in fundraising. It is important to remember that working with a finder can be tricky and if not done correctly, your company can wind up paying money for no reason or worse, not consummating a financing all together. In this post, we will discuss some key points to remember when working with a finder.
One of the most important things to remember when working with a finder is to have a non-exclusive agreement in place. This means that you are not obliged to work exclusively with any particular finder. and if your efforts to find funding (whether on your own or through another finder are successful), you are not obliged to pay a finder who was not involved in this achievement. This enables your company to shop around for the best deal, use more than one finder and increase the chances of finding investors.
Even though your finder fee agreements should be non-exclusive, a finder should have the confidence that you will pay them once they have successfully found an investment for you. This is achieved by attaching a list of potential investors that the finder intends to introduce you to – if any person on the list makes an investment in your company (within the timeframe detailed below), this finder earned their fees.
Finders should be paid for successful investments from investors appearing on the agreed upon list (see above), if such investment closes during the terms of your agreement with the finder or within a certain period thereafter. This period is called a TAIL PERIOD. Remember to keep the tail period as short as possible and if possible, not longer than 12-18 months. The tail period provides comfort to a finder (many times working only on success commissions), that the finder agreement won't be terminated immediately prior to an investment made by an investor introduced by the finder.
A finder agreement should be limited to a certain period of time (typically, 12 months).
Termination on a short notice
Another important point to remember is to allow for termination of the finder agreement, without cause and upon a short notice period (7 – 30 days). This means that if you are not happy with the finder's performance, you can simply terminate without engaging in an argument whether the finder breached the agreement and without having to give the finder a large notice period. In other words, if a finder is not meeting your expectations, the agreement can be terminated quickly and easily.
Do not leave "open" agreements
If a finder is not performing satisfactorily or is otherwise inactive, it is imperative to terminate and not leave an agreement "open". First, by terminating, the tail period starts to run. Second, if the agreement is not terminated, a finder could continue to bring you leads even after you are no longer interested in working with that particular finder.
– Make sure to have a non-exclusive agreement in place.
– Keep the tail period around 12-18 months
– Allow for termination of the agreement, for convenience and on short notice.
-Do not leave "open" agreements.
By following these tips, you can ensure that your experience working with a finder is positive and beneficial for your start-up.