How much would we compensate a person for introducing us to an investor?

Chris Barsness, startup, finance, law, and tech nerd

This is actually a complex issue that many startups have wrestled with for decades, how to compensate someone who helps bring cash to a needy startup, i.e. a "finder's fee"?

Companies push the limits on this, but the general legal answer is that in most states, unless that person is a registered broker/dealer licensed to sell a security, they can't get paid anything, equity or cash.  I will assume that your brother is not a registered/licensed broker/dealer.  Since the finder is helping to sell stock or other equity in your company to the investor, they can be considered a broker/dealer and would need to be licensed to get a finder's/success fee.  However, without these intermediaries, some startups would never meet angel investors and run out of cash, so there are some grey areas.  It is a matter or weighing the risks and rewards of the transaction.  

There is much more to the exemptions and securities laws involved to go into in this answer, but if you decide to pay something, put a finder's fee agreement in writing with certain limits on what the finder can do to keep their involvement minimal and how to identify their contacts.  Only agree to a set amount for the actual introduction to the potential investor.  When it comes to equity in your company, for most startups seeking initial seed angel funds, don't get too concerned about what the percentage of equity given out is since it will be diluted down in future rounds most likely anyway.

Giving someone an incentive can be amazing at how it produces results.  There are more strategic and legal issues to whether to put it in writing, and if you put it in writing, what specifically should go into the agreement, which is often something based upon state law and regulations, but I don't want to give away all my secrets.  In my experience, I have put together tons of finder's fee arrangements for part of a percent to 10% of the company when out raising money, but very few ever panned out and if they did, you can worry about how to get them compensated when the money actually hits the bank account.

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