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You are here: MacNN Forums > Community > MacNN Lounge > Venture Capital: Investment Firm Asking for a Retainer?

Venture Capital: Investment Firm Asking for a Retainer?
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freudling
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Jun 8, 2011, 04:59 PM
 
Hoping someone on here has some experience raising money for a business.

We've linked up with a small investment firm. The backgrounds of the guys seem good. They are interested in our business and think they can raise us money. Commission of 7.5% and less as the money they raise goes up.

Plus a management fee of up to $5000 per month for the first year to basically babysit the business.

Now, onto the part we're not agreeing on. They want a $2500 engagement fee up front to move forward with shopping our business plan with potential investors. They've already done an initial shop and the response was positive.

We're low on money.... we could come up with this but it seems like a quick cash grab with no guarantee of any money to be raised. Seems almost superfluous but they said they've waived the work fee for us so this engagement fee is not that bad considering that.

We pushed back and said we'll pay it on top of the commission once a term sheet comes in that we sign.

They pushed back and said they would half it so $1250 up front. Then it ended with $1000. They know we're low on cash so perhaps that's why they came down.

But it seems like a bit of a red flag... if they're so sure they can raise funding, why this damn fee?
     
Doofy
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Jun 8, 2011, 05:05 PM
 
Originally Posted by freudling View Post
But it seems like a bit of a red flag... if they're so sure they can raise funding, why this damn fee?
There ya go.
Run away. Fast.
Been inclined to wander... off the beaten track.
That's where there's thunder... and the wind shouts back.
     
turtle777
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Jun 8, 2011, 05:36 PM
 
Yes, this easily could be a scam.

How well do you know this investor ?
Ask for references, and then see how the references dealt with them.

-t
     
Shaddim
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Jun 8, 2011, 05:57 PM
 
This isn't uncommon, they're padding for expenses, if they're legit. I remember paying something similar, ~$2k, several years ago when I started one of my businesses. I've since sold that company and retired, but it was one of the best moves I ever made.

However, if you aren't familiar with them then you're taking a risk. Find out more about them, get some references and check them out thoroughly.
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
- Thomas Paine
     
Phileas
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Jun 8, 2011, 06:56 PM
 
The $2500 are partly there to cover expenses, partly to make sure that if you should go bust they've got at least some cash out of you.

Nothing unusual there, in fact the fee seems on the low side - I would have expected a number closer to $3k.

When (if) we do business with startups we always bill our fees 50% upfront, all external costs 100%.

Having said all that, I agree with the advice to check these guys out. Better safe than sorry, especially if you're low on cash.
( Last edited by Phileas; Jun 8, 2011 at 07:04 PM. )
     
freudling  (op)
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Jun 8, 2011, 08:48 PM
 
Thanks guys. Anybody else feel free to chime in.
     
ShortcutToMoncton
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Jun 9, 2011, 06:58 AM
 
Why don't you just call up other investment companies and ask about their fee structure? That would be easy and simple and satisfy you that nominal engagement fees are a normal practice in this area.

greg
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Peter
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Jun 14, 2011, 02:05 AM
 
This is a tremendously bad deal.

All good and even mediocre venture capitalists are aware that these consultancies that help you raise funding are a total joke, so they certainly won't want to place their capital in a company that relies on them to get VC.

Venture Capitalists, by definition, need to be easy to get a hold of. If you cannot raise the capital yourself, you are certainly never going to be able to raise capital any other way.

How much are you looking to raise? If you mean actual VCs, I assume it is in excess of $500,000? Or do you mean an angel syndicate or something?

I have a lot of experience with this, amongst other things I have raised reasonable amounts of capital and have also been funded by Y Combinator. Happy to give my $0.02
we don't have time to stop for gas
     
Waragainstsleep
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Jun 14, 2011, 04:52 AM
 
For $5k a month surely you could hire your own full time guy to go looking for VC? Seems steep to me.
I have plenty of more important things to do, if only I could bring myself to do them....
     
finboy
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Jun 14, 2011, 11:32 AM
 
Originally Posted by Phileas View Post
The $2500 are partly there to cover expenses, partly to make sure that if you should go bust they've got at least some cash out of you.

Nothing unusual there, in fact the fee seems on the low side - I would have expected a number closer to $3k.

When (if) we do business with startups we always bill our fees 50% upfront, all external costs 100%.

Having said all that, I agree with the advice to check these guys out. Better safe than sorry, especially if you're low on cash.
Yep, I thought the number was low too. Used to be closer to $5k inclusive, but that depends on the business you're in I guess. And I imagine things are leaner now.
     
freudling  (op)
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Jun 21, 2011, 01:48 AM
 
Now we're being told to file a patent for our idea a rough prototype software. We'll also need to come up with other monies to pay legal fees for the preparation and filing of not just the patent, but other legal stuff for the private offering.

They want us represented by a top corporate lawyer. I guess this will give investors peace of mind when he vouches for a patent pending because patents take years for approval so investors want assurance patents will be granted.

We're being told we'll need $50,000 plus to cover off the costs of all of this. That this is vital before we can secure funding.

And valuations. Share prices? They're valuing us at $12 million pre-revenue. I think it's way high but our financials look good on solid ground and a big market.

My valuation is $1.25 million. Standard tech start up pre-revenue valuation. I haven't told him this yet.

Then he said: special offering for friends and family 10 blocks of shares at 50,000 shares each block at 25 cents per share.

Remainder? 49,500,000 shares at $1.50 per share.

Any thoughts?
     
brassplayersrock²
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Jun 21, 2011, 02:00 AM
 
run away. I don't like this one bit.
     
Peter
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Jun 21, 2011, 02:26 AM
 
good lawyers will postpone payment till after you've raised. it's a good check to see if lawyers think your investors are a waste of space (they wont represent you if you or your investors seem moronic)
we don't have time to stop for gas
     
Phileas
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Jun 21, 2011, 07:16 AM
 
Not as a rule. Some of them, who specialize in that field, might, but our lawyers for example would politely suggest another firm if you'd approach them with that suggestion. They are not in the business of sharing risk, they are in the business of getting paid for their advice.

If the patents in question form a significant part of your IP then you will need to secure them at some point.
( Last edited by Phileas; Jun 21, 2011 at 07:24 AM. )
     
ShortcutToMoncton
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Jun 21, 2011, 07:57 AM
 
Originally Posted by freudling View Post
Then he said: special offering for friends and family 10 blocks of shares at 50,000 shares each block at 25 cents per share.
The easiest way to destroy family/friendships is to go into business together. Multiply that by a thousand if you're talking about members investing into another's start-up.

You'd better be damn certain it's a lock before you let friends/family pour their hard-earned money into what you're doing.
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finboy
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Jul 1, 2011, 02:57 PM
 
Originally Posted by ShortcutToMoncton View Post
The easiest way to destroy family/friendships is to go into business together. Multiply that by a thousand if you're talking about members investing into another's start-up.

You'd better be damn certain it's a lock before you let friends/family pour their hard-earned money into what you're doing.
That's for certain. I would avoid family investments if you can do it.

As for the $50k, does that include everything (patent atty, venture capital intros, etc)? If not, it sounds like you're paying for a fishing expedition. Best idea is to find someone who only gets paid if they actually get you VC funding, like commercial mortgage brokers do. You may have to pay a patent atty up front, and that will certainly vary based on the industry and the type of IP you're trying to document/patent.

The valuation itself is going to be driven by whether the product/service can be replicated easily. Even with a patent, if you identify a business model or customer sector that can be successful there is always someone who can come take it away. It's not a matter of "if" competition will take away your profits but "when." That may not happen for years and years, but that's the type of question that will determine how to value the future cash flows of the firm.

Another important characteristic is management experience/talent/personality. VC firms will screen first on intellectual property potential, but they won't give money to a bunch of losers. It's important that they can see the current management team taking the firm from little to big, or that there's a transition plan in place. If the firm is very closely held already, they should have a succession plan for the top managers as well.
     
Peter
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Jul 1, 2011, 09:04 PM
 
we don't have time to stop for gas
     
freudling  (op)
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Jul 1, 2011, 11:01 PM
 
Once again, advice from the MacNN gang is: invaluable. All this has been a big help, and I've connected with a few interesting people on here.
     
finboy
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Jul 5, 2011, 01:14 PM
 
Wow, what a great read!

Also, sounds like there are some law firms that offer deferred compensation for startups. That's a good thing if true. The first, best relationship you should have is with an experienced attorney.

Just make sure he/she doesn't ask for founder capital!!!!!! [from the link]

[By the way, that kind of stuff used to be the norm - if you wanted funding 25 years ago in most "normal" industries, you had to find an angel, and that angel might take a 40% share. That's why so many people ended up doing better in their SECOND businesses, after they'd learned the ropes and paid off the angels. Valuation of a gas station in a rural community, for example, was near impossible, but someone who knew the community would take the chance. Thank goodness too. In a global industry or IP startup, that shouldn't be as big a deal now.]]
     
Peter
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Jul 7, 2011, 06:42 PM
 
if ever you have any questions about raising funding or anything in this space, just read venturehacks.com

go to the archive and read every post. serious.
we don't have time to stop for gas
     
   
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