are intermediaries who help companies and investors find one another. Brokers, who are licensed by the SEC, are sometimes confused with "finders" who provide similar functions but are not so registered. Many entrepreneurs hire brokers or finders to help them raise money in the hope, that by so doing, they will reduce the amount of time they will have to spend in fund raising. For a busy entrepreneur, time spent raising money almost always takes time away from running the business.
In some cases, brokers can provide companies with valuable introductions that lead to financing. Some brokers can explain alternative sources of funding and help structure viable financing packages. Few, however, can completely replace management in the fund raising process. Usually, the most they can do is provide management with introductions and a chance to "pitch" the company. Potential investors invariably want to deal directly with management. As a result, almost all entrepreneurs stay involved in the fund-raising process and continue to look for investors on their own, even when they hire a broker.
Entrepreneurs should be careful when dealing with a broker. They should make their agreements explicit and put them in writing. The agreements should define what the broker's responsibilities are, when he is entitled to a commission (usually when an investor he introduced to the company funds the company's needs), how much the commission will be, and when his assignment expires. To the extent possible, entrepreneurs should investigate the broker's reputation by talking with his present and former clients. They should also have explicit written understandings about the limits on the broker's authority to commit the company to any funding proposal.
Common issues management needs to address carefully in any brokerage agreement include:
Most brokers will work on a contingency fee or other prearranged fee basis. Whatever arrangements are made, however, management should understand that the broker's fee may sometimes come out of management's pocket. Some investors insist that money they put into a company go toward developing the company's product, not toward paying a broker.
Other professionals who can provide introductions and advice about finding money and structuring financing packages include bankers, accountants, lawyers, and - probably the best source - other entrepreneurs. See: Consultants, CPAs (Certified Public Accountants), Due Diligence, Finders, Investment Bankers, Lawyers, Packages.