Brokers . . . 

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:

• Scope of engagement. When is the broker entitled to compensation? In addition to a retainer to cover operating costs, most brokers ask for a success fee which is a percentage of the funds actually raised. Under what conditions is the success fee payable? What, if anything, does the broker have to do besides identifying the prospective funding source to get paid? Is the broker paid if the company is funded by a source identified by the company or someone the company has already contacted? If so, is the success fee reduced because of the prior contact?
  

• Size of the success fee. Is the amount of the fee reasonable? How does it compare with rates charged by other money finders?
  

• Broker's duties. What does the broker have to do in addition to assisting in raising capital? Is the broker being engaged to prepare a plan or perform other specific tasks? If so, they should be specified.
  

• Company rights. How involved will the company be in the process of contacting funding sources? Inasmuch as the company is ultimately responsible for the securities sold, should not the company have the right to control who receives company information? Also, companies often negotiate approval rights over travel and other extraordinary expenses incurred by the broker.
  

• Termination of company obligations. When does the engagement expire? When and under what conditions can the company terminate the agreement before the expiration date? What is the effect of termination on the company's obligations to pay fees? Most brokers insist on being paid a success fee if the company receives funding from a source introduced by the broker after the agreement has been terminated. They do this to remove the company's incentive to terminate the brokerage agreement just before funding in order to escape the success fee payment obligation. Even so, there needs to be some reasonable limit to the time after the engagement during which the company is required to pay a success fee. At some point in time the connection between the broker's activities and the funding become too tenuous to support paying a success fee.
  

• Broker's license status. Is the broker a registered broker-dealer? While the securities laws do not require all money finders to be registered, the structure of the company's engagement may require the broker to be registered. If he is not, it may cause difficulties with state securities laws when funds are raised.

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.