On Quora someone asked:
Is the success fees of 3% (of the money raised in that round) for an introduction to investors good for a startup that wants raise its seed investment?
Is it ok to accept this deal if one firm promises to introduce investors?
This was my response:
I live in Southern California. Around here, there are two types of people who act as intermediaries to investors. One charge a nominal fee of around $5,000 just for an introduction. Another type of group charge 3%, like you may be seeing on the offer with the company that is willing to do the introductions.
Paying someone $5,000 up front is absolutely ridiculous. There was this one guy at my old work at an investment fund. He would just set up meetings with all these random business owners with my boss. My boss would chat with them for a bit. Then he would blow the company off. The guy who introduced everyone to my boss though? He was earning $5,000 each introduction!
It was great for him! Actually, it kind of made me want to charge people to meet my boss. But I never really got into it.
Now, you’re asking whether it is okay to accept a deal of paying out 3% to a third party who makes an introduction on your behalf. The answer to your question is, it depends.
Let’s say you do receive angel financing through one of these introductions. You will more than likely be issuing a promissory note with convertible debt. Debt means that it has to be repaid, unless it is converted to equity. However, to have it convert to equity, certain milestones would need to be hit.
Let’s say you raise $50,000 in your first round of financing through this group. That’s $1,500. No big deal. However, if you’re looking at paying back an interest rate of 12% as well, it can get pretty inconvenient.
If you’re raising $500,000, that’s $15,000 that you just gave away.
Is it okay?
At the end of the day, it’s up to your discretion.
How much is your time worth to make the introductions to investors yourself, compared to having a third party just send your name in a hat over to an investment fund or angel advisor group that you could find on the internet yourself?
The answer to that question will tell you whether or not it is a good idea to pay a third party to make these introductions for you to help you get financed.
Originally posted on Quora.
Leonard Kim consults startups and writes books like The Etiquette of Social Media: How to Connect and Respond to Others in the World of Social Media