Intro: [00:00:02] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.

Mike Blake: [00:00:36] Welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we discuss the process of decision making on a different topic for the business owners’ or executives’ perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.

Mike Blake: [00:00:58] My name is Mike Blake, and I’m your host for today’s program. I’m a director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia. My practice specializes in providing fact-based strategic and risk management advice to clients that are buying, selling, or growing the value of companies and intellectual property. Brady Ware is sponsoring this podcast, which is being recorded in Atlanta per social distancing protocols.

Mike Blake: [00:01:26] If you like to engage with me on social media with My Chart of the Day and other content, I am on LinkedIn as myself and @unblakeable on Facebook, Twitter, Clubhouse, and Instagram. If you like this podcast, please subscribe on your favorite podcast aggregator and please consider leaving a review of the podcast as well.

Mike Blake: [00:01:44] Our topic today is, Should I hire a finder to raise money? And according to Carta, it takes about two years on average to secure funding for a startup. And according to the corporate finances to the chances of being funded by a bulge bracket venture capital fund, are less than one percent, and that’s probably being generous.

Mike Blake: [00:02:04] So, I’ve been around the startup world a little bit. And our guest who’s coming on today has really been around the startup world a lot, more than I have. And, you know, raising money for a startup is not easy and it’s not fun. Raising money for a startup means a lot of rejection, means a lot of unsolicited advice, some of which is good, some of which isn’t very good. And, you know, I think for many startups CEOs, it’s probably the part of the job that most of them like the least.

Mike Blake: [00:02:41] And, therefore, it’s not unexpected that one might anticipate that it would be tempting to outsource that task to somebody, and that somebody is typically called a finder. And we’re going to talk about specifically what a finder is. But if you’re in the startup world, you already know what a finder is. If you’re not in the startup world, but will be at some point, this conversation is going to come up, I promise, because a finder can perform, not just a very important, but actually an existentially important service for a startup. But the choice is not without its pitfalls.

Mike Blake: [00:03:20] And joining us today in this conversation is Karen Rands, who is President of Kugarand Capital Holdings. Karen’s extended team offers coaching and services to entrepreneurs to help companies with capital strategy and investor acquisition through the Launch Funding Network in investors education, screening due diligence, and syndication services through the National Network of Angel Investors. Karen Rands is the leader of the Compassionate Capitalist Movement, is an authority on creating wealth through investing and building successful businesses that can scale and exit rich.

Mike Blake: [00:03:52] Karen turned the knowledge she gained from her corporate experience of working with startups and innovation at IBM and the 12 year she spent managing the Network of Business Angels and Investors, one of the top 50 angel groups in the U.S. at its peak, into the best selling primer Inside Secrets to Angel Investing. Her book and the accompanying resource panel teaches savvy investors how to diversify their investment portfolio to include private equity ownership into entrepreneur endeavors.

Mike Blake: [00:04:21] Karen hosts the popular business podcast, The Compassionate Capitalist Show. The weekly show is available on all the major platforms with a library of over 240 episodes. Her chats with angel investors, venture capitalists, business industry leaders have been downloaded over 145,000 times. Karen also speaks to economic development community and corporate groups to spread the word about compassionate capitalism as a way to strengthen and grow our economy.

Mike Blake: [00:04:50] Economics is a passion for Karen, having received her Bachelor’s in Economics and English from Emory University before earning her MBA in Marketing from University of Florida. Karen Rands, welcome to the Decision Vision podcast.

Karen Rands: [00:05:03] Thank you, Mike. Great to be here.

Mike Blake: [00:05:05] And I’m going to try to not study here. I don’t know what the heck is wrong with me. I probably need another sip of my Earl Grey tea, but we will [inaudible]. So, Karen, again, thanks for coming on the show. I think our listeners are going to get a lot out of this. And and I want to start, for those in our audience who maybe don’t know exactly what we’re talking about so they have a shot of hanging into the conversation, what is a capital or a money finder?

Karen Rands: [00:05:31] So, typically, the finder will offer to locate investors for a company in exchange for a success fee, and that’s the commission based on what they’re able to raise. They’re most often not registered with the SEC, and that’s where it becomes a problem. But finders are also used for angel investors in startups and raising capital, but also could be a part of reverse mergers and also with merger acquisitions, trying to find people to buy a company or fund an acquisition of a company.

Mike Blake: [00:06:07] And why do companies find it attractive to work with a money finder?

Karen Rands: [00:06:12] Okay. Well, you know, the common perception, particularly with startups, is that finders are a cheap way to find capital. Because, you know, actually, if you’re only paying for a success, then it doesn’t actually cost the entrepreneur anything, right? The traditional type of finder that’s in this context, they don’t have the same types of retainers and fees like broker dealers, and the percentage that they charge on the money they raise is a lot less than a licensed broker dealer.

Karen Rands: [00:06:39] They also have the idea that multiple finders working on their deal because, since they have no skin in the game for that entrepreneur, why not have a bunch of people trying to find its capital. But the risk in this is this false sense of expectation that those finders are actually doing the work. But what can happen on the investor side, particularly in a community like Atlanta where we live in, if there’s a lot of finders working it, it might pass an investor’s desk a couple of times or they see it someplace. And they start to think, “Well, what’s wrong with this deal? This deal must stink because so many people are shopping it.” So, you know, that’s always the way that you should consider it. There’s a different way to approach it and we’ll get into talking about, but most often it doesn’t work out near as well as entrepreneurs think it will.

Mike Blake: [00:07:30] Yes. I want to pause on both those points you raised because I think they’re both interesting. And one of them, frankly, I hadn’t thought of. The first point being that, you know, it can be tempting to wish your problems away because you hire a consultant, right? And that was a lesson that my first full time boss, John Noel, taught me was never let a consultant wish your problems away. And it’s easy to let a finder wish your problems away, right? I mean, you know the deal. Raising capital is not hard and it is not typically self-esteem building either.

Karen Rands: [00:08:05] Right. Yeah. It’s very hard. And you got to have Teflon in order to deal with all the nodes and rejection that you get in the process. Exactly.

Mike Blake: [00:08:15] Right. So, I mean, it’s tempting to say, “Well, who needs it? And you’re going to take this off my plate. Yes, please. And thank you.” Now, the other part I hadn’t thought about, but I think makes perfect sense – I love you to elaborate on it, if you can – is that if you do have multiple finders in the market – and I agree with you, that’s a strategy you should do – if everybody’s on contingency, it’s all about from the finder standpoint, which is the deal that’s closest to getting close and therefore my fee. So, you want to have it out there.

Mike Blake: [00:08:49] And we both know the deals that are circulating in the marketplace and we both know instances of “those entrepreneurs who seem like they’ve been raising money for 19 years and they’re still a startup”. And there’s that deal staleness. But I hadn’t thought of the fact that finders can actually create that as well if you have the same deal coming from different angles.

Karen Rands: [00:09:12] Yeah. Right. Right. Because, you know, sometimes what ends up happening, to your point about the paid advice, if a company goes through an incubator and accelerator and they get some information, and through that process of doing that, because of the mentors, the kind of finder you want is the person that loves your deal, is mentoring you on the deal, and is happy to share it with other people because they like your deal. They like you and they’re considering investing themselves in it. So, that’s not the finder that we’re talking about.

Karen Rands: [00:09:47] The finder that we’re talking about is, oftentimes – and I, myself, have been in this position back when I was running the angel group and working with screening deals and working with entrepreneurs and investors – is that you tell them that they have to do X, Y, and Z to be investable. They might have to pivot. They might have to do more research on their marketplace, their go-to market, how they’re going to scale. They might have something fundamentally wrong, but they don’t want to hear that.

Karen Rands: [00:10:14] So, it’s much easier to go to a finder that says, “Hey, I can raise you that capital. I know these guys. I’ll put it together at lunch or at dinner or this or that. Give me five grand or pay for the big hoo ha this stuff and five percent.” And then, when that finder doesn’t raise the capital, they get to blame the finder. And the finder is just doing a side gig because, come on, if you’re not really paying them, you’re not paying the 5,000 and you’re just doing the percentage of, well, how are they paying their bills? It’s not their core thing. And they will work with the ones that are paying them.

Karen Rands: [00:10:50] And you just become the one, if I come across an investor that didn’t like the deal that I’m getting paid for and they’re in your industry, then I might introduce you because I’m not leaving everything on the table. I might get a little something, something.

Mike Blake: [00:11:02] So, that brings up so many points here. We could probably make a whole podcast just out of that last two minutes. But one thing you bring up that I think is important – and correct me if I’m wrong – my impression of the finder market is that it’s very informal. We both know it’s unregulated or quasi-regulated by the SEC, and we’ll get to that in a little while, I think. But there isn’t, like, some storefront that says finders are us.

Karen Rands: [00:11:34] No.

Mike Blake: [00:11:34] If you do a Google search, you’re not going to find, like, capital finder generally. It’s often somebody that’s doing something else kind of for their living, isn’t it?

Karen Rands: [00:11:44] Yes.

Mike Blake: [00:11:45] It could be an attorney. It could be an accountant. It could be somebody else. Or, like you said, somebody that is genuinely interested in the deal, but they want to be paid for helping to close out the round. And so, how does that change the dynamic of the relationship as opposed to most service providers where you kind of own them after you pay the fee. I perform a service as a consultant. My client, to a certain extent, owns me rightfully so. That relationship with a finder is going to be a little different, isn’t it?

Karen Rands: [00:12:19] Oh, yes. Oh, yes. Because there’s really no skin in the game on the entrepreneur side. The only skin in the game is on the finder’s side because they’re the one that’s doing all the work. And for finders that have kind of played in that space, because I’ll come across young people that haven’t been burned by any of this stuff and they think, “Oh, I know people. I was a participant in X, Y, Z incubator. I met these investors. Now, I’m going to turn around and go and help you connect it, and you’re going to give me a percentage.” And so, they have a little bit of skin in the game.

Karen Rands: [00:13:00] But if they don’t get a hit in the first half-a-dozen conversations, then they will just not keep working on it. They’re looking for a low hanging fruit. And you don’t know that they’re not working on it because they think, “Well, maybe this guy will get back to me,” or maybe whatever kind of a thing. And so, you get a false sense of stuff getting done as an entrepreneur that don’t get done.

Mike Blake: [00:13:26] You know, that’s interesting. It approaches that sort of a different angle. Something I say a lot, whereas, in a way, a deal pitch is like a joke. If the person doesn’t get it right away, no amount of explaining after that makes the joke funny. It just never happens, right? Nobody says, “Now, I get it” and just hyperventilating. I mean, they may laugh politely, so a golf applies kind of thing or people will laugh, but they’re not really laughing.

Mike Blake: [00:13:47] And deals are kind of the same way, right? And I guess from a finder’s perspective, when a finder takes that on, they probably have in mind some small group of a handful of people they think would have an interest if it’s all knows. They’re not going to make it their life’s mission, like Indiana Jones to the jungle, to find those investors. Because that’s just not their thing.

Karen Rands: [00:14:17] Right. You know, the exception is if they have to have a vested interest. Somehow there’s got to be a vested interest. And I guess we’ll get into that and how that works.

Mike Blake: [00:14:27] Now, I think a lot of people, initially, if they don’t understand the finder market, they’re often turned on to or find themselves – what we would call – broker dealers of some kind, business brokers, investment bankers, and so forth. They don’t generally like to take on fundraising deals, which is a reason I think that finders have the niche that they do. Is that also your experience? And if so, why do you think that is?

Karen Rands: [00:14:55] Okay. So, this one is one to unpack because broker dealers have historically been the only people that were licensed to be able to raise capital for projects, deals, whatever. And there’s a bunch of licenses. It’s not just one license. But they not only have the ability to find investors but handle the transaction, structure the transaction, and the exchange of capital money for the stock. They can do all of that stuff.

Karen Rands: [00:15:31] And so, sometimes when a finder or a person acts as a finder and they’re not licensed, there’s this term that they were acting as a broker dealer, or acting as an investment banker that is licensed, or acting as a business broker when they really weren’t. And so, because they weren’t licensed to do that, so they can’t act as something that they should be licensed for. That’s illegal. And that’s where you get into who goes to jail and who pays fines and those kind of things when things like this blow up, which oftentimes they don’t because it’s not really something that the SEC is chasing after.

Karen Rands: [00:16:07] So, you know, it really happens when the company doesn’t perform the way the investor expected it to perform and they file a complaint with the broker dealer. The FINRA – which is a quasi not quite a government agency bureaucracy that I’m not a big fan of because I think they’ve done more harm to the financial markets than they’ve done to protect investors – they then go in and investigate, so the broker dealer is held accountable for all of that stuff.

Karen Rands: [00:16:39] And there’s a couple of different things that broker dealers are beholden to. One is what they call, it’s basically a fair – I forget the exact terms, but it’s like a fair disposition. So, that means that they have to make that opportunity available to all of their clients and all of their dealers. So, the deal has to be big in order to get spread out, particularly if you’re dealing with a giant company like Ameritrade or Raymond James or something like that, that a wire houses. Even a small, independent broker dealer who probably has a thousand clients that they manage money for. And so, they have to make it available. It has to be fair and equitable. So, if it’s not big enough to make available to everybody, then it’s not worth doing.

Karen Rands: [00:17:36] And the fees associated with that, they usually will have between $5,000 to 10,000 a month plus fees to do their offering documents, plus big percentages. They’re allowed to charge up to 15 percent. So, if a company is needing to raise capital, a startup that raises a million, 2 million, 3 million, maybe another series A round of 5 million or something like that, that’s all still small for broker dealers. So, broker dealers just won’t really touch it.

Karen Rands: [00:18:02] And because of the regulatory investigation environment of FINRA, it’s really easy if a deal goes south and they take on the responsibility of that due diligence and an investor, “Oh. You put it into my mom’s stuff.” The son says, “She should never have invested in that deal.” Then, they can say, “Well, it was too risky for that particular investor.” And, therefore, it’s a violation of their broker dealer, there’s another rule for that.

Karen Rands: [00:18:32] And then, one of the things that an independent broker dealer or independent financial planner that just has their license hanging with somebody, there’s this fear, uncertainty, and doubt, the FUD, that comes along with what FINRA can do and not do. There’s real rules.

Karen Rands: [00:18:52] And then, there’s this idea – they call it – selling away. So, where that financial planner that has clients that might want to be angel investors gets into a bind is that even if they’re not taking a commission on that transaction – unlike real estate, because a broker dealer doesn’t do buy and sell real estate – they can disclose that they helped this investor do a commercial investment in real estate that’s part of their portfolio, and it’s not considered selling away.

Karen Rands: [00:19:24] But if they help this person do an angel investment deal put 50 grand into some startup, then it might be considered selling away because technically the broker dealer could have – even though they wouldn’t have – handled that transaction. And that independent can lose their license. And so, they steer away from it. So, there’s really no way for companies to really go to the people in the financial services sector to get that. And that’s one of the big reasons why the Jobs Act was passed bipartisanly.

Mike Blake: [00:19:59] So, you touched upon this – this is a great segue into the next question, which is that, there are risks to hiring a finder and they go beyond simply sort of the stale deal syndrome, don’t they? I mean, there are instances where a finder deal could potentially blow up if things aren’t done correctly, right?

Karen Rands: [00:20:21] Right. Absolutely. So, the SEC has these rules that, as I mentioned, if a deal has milestones and they expect and say they went through a regular or private placement memorandum, which is the document that entrepreneurs prepare to disclose the risks of their offering. And in that, it doesn’t fully disclose, let’s say. And that investor thinks that they asked all the questions, but they don’t ask all the questions.

Karen Rands: [00:20:51] And they think that this company is going to get that big deal with Microsoft. And, therefore, they’re going to make all of those projections. And in reality, they never actually had a real deal with Microsoft. They just had a conversation at a trade show, let’s say. And so, they don’t get that deal, the deal fails or the deal stumbles. And they don’t raise the next round of capital or they don’t do their stuff and they don’t fully reach the objectives.

Karen Rands: [00:21:17] And that investor can sue because they can say, “That was fraud. They said they were going to get this deal. They didn’t get this deal.” And then, under those terms, when the SEC investigates, they’ll say, “Oh, that person did commit fraud. They didn’t fully disclose the risks of that investment.” Or they used their money in a wrong way, or they used a finder that wasn’t licensed.

Karen Rands: [00:21:43] And when the SEC finds out that they used a finder, they might also find this out when that company goes to sell to a public company and the public company has to do the disclosure, or they go to go public and the SEC is looking at all their stuff and they find that. In any of those circumstances, the deal can go south and the investors have the right of rescission – they call it – where they can get all their money back that they put into the company at whatever they put it in. They don’t make any money on that.

Karen Rands: [00:22:11] But that is a recipe for the company to go out of business because they have to pay back this money that they don’t have that they spent. And that founder or that executive office that did that has the potential to go to jail, too, depending on how serious the nondisclosure are or the fraud is. And they get labeled a bad actor. And so, a bad actor is one of those things that is now in all of the Jobs Act offerings, is that, you cannot have a bad actor in that company that owns more than ten percent of the company and that kind of stuff.

Karen Rands: [00:22:46] And so, those are all kinds of things that is all new language to people that are investing in some of these companies. But that’s what happens. So, the finder usually gets a slap on the wrist unless they’ve been doing it a lot and a lot. And I got some horror stories of people that have defrauded people all over in Georgia but never got held accountable because of the fragmentation of security laws when it comes down to a state level. But then, also, the big thing is that it really hurts the company when they use finders and it gets found out.

Mike Blake: [00:23:15] So, when typically do companies use finders? In your mind, do they typically find them at the pre-seed level, or the seed level, or when they get into more institutional capital? What stage of the company’s development do they typically engage with finders?

Karen Rands: [00:23:36] It’s usually when they don’t know how to go raise with friends and family round, or when they’re raising their first seed round outside of a friends and family round. So, it’s still really early on. Because once you have real investors in your deal, because you raise money from an angel investor group and stuff like that, if you maintain good communications with those people, those investors have a vested interest to help you find other capital. Because, otherwise, their investment doesn’t grow the way they expect it to grow.

Karen Rands: [00:24:06] And so, it’s really before there are real serious accredited angel investors involved in a deal. And that an entrepreneur doesn’t know where to go, and they’ve not been able to qualify to get to an angel investor group, for lots and lots of different reasons. It doesn’t necessarily mean that the deal is not meritable. It could just be the industry that that local angel investor invests in, and they’re not in that same industry. So, they get desperate to try to find investors. And then, they’ll go and they’ll ask people and they’ll say, “Hey, I need you to go help me find investors and I’ll pay you a commission.” I mean, that’s the conversation. And they really ask that.

Karen Rands: [00:24:45] The difference is that somebody that’s professional, such as myself, that knows investors, that knows how to structure what makes an entrepreneur investable, we’re professionals. And just like a lawyer or an accountant is professional, they rarely will go file patents and do all that stuff hoping that Wednesday you’ll raise capital and then be able to pay me. They don’t do that work thinking that they might get paid in the future. They do the work for the work they’re doing right now.

Mike Blake: [00:25:15] So, we talked about some of the pitfalls here. How do you mitigate those risks? I mean, the risks are obviously out there. You still want to use a finder. I mean, do you just have to sort of accept those risks? Or are there things you can do to lessen the probability that those things will happen to you?

Karen Rands: [00:25:33] So, part of it is really validating doing your own due diligence on a finder, if you’re going to be serious. Now, first of all, you’re not going to want to do it on 100 percent commission, we already covered that. You’re not going to want to have a whole bunch of people shopping your deal, we covered that. So, what you want to do is find somebody that really has relationships with funding sources, whether they’re angel investors, private equity funds, family offices, VCs, whatever it is. They’ve got relationships with people and know how to talk the talk of investors.

Karen Rands: [00:26:06] And the second thing is that you want to compensate them for the work that they’re doing. You need to put a contract in place. And the best way to avoid the pitfalls of what the SEC might do is to be able to give them some kind of equity ownership in the company, give them a title in the company, have some kind of compensation plan, that’s based, or come up with a fixed fee, “This is what it’s worth if you raise this amount of money” so it’s not a percentage. And then, you pay them for the work they’re doing and they’re reporting to you just like a consultant does, just like anybody else does.

Karen Rands: [00:26:40] They have a Google Doc spreadsheet where they’re listing the investors that they’re talking to, the status, the meetings, and all that stuff. And that unlicensed person isn’t acting like a broker dealer. So, they’re not selling the deal. They’re making the introduction. The founder has to sell the deal. The founder has to create the documents that one of the things that that person might be, that investor acquirer, the investor introducer rather than a finder, is, they know what kind of documents those investors are expecting to see to market the deal.

Karen Rands: [00:27:16] So, the entrepreneur has created it under the guidance of this person. And then, that person takes that document. And the document sells the company to have a conversation with the founder. Or to go to a due diligence portal. So, all that information and directing it back to the entrepreneur. And that person that’s helping you will validate their level of being accredited or validate their level of interest. And then, give them access to this portal to do due diligence and keep driving, overcome the objections of the company. But, really, it’s ultimately up to the founder, that entrepreneur.

Karen Rands: [00:28:01] But the entrepreneur should have people that are in their board, people that are in their company that all have a vested interest in the success of the company. So, in that situation, everybody in the company is acting as a finder. Because everybody in the company is trying to find the capital to help the company go to that next level. And somebody you might bring on is a board of advisor, because you want to hire them. They’re a top gun in an industry that’s really going to open up doors for other capital. So, what you want to tell that person to do is say, “Look, I’m going to hire you for 100 grand -” or whatever that is “- plus stock. But you’ve got to go find an investor that’s going to put a hundred grand in this company to pay your salary.”

Mike Blake: [00:28:45] Actually, before I go on, there’s one comment I want to make because I think that’s really important. I think it’s really smart. People are surprised when I tell sometimes my clients that, “You’re actually better off, I think, paying somebody like a finder, a retainer, or at least a modest retainer in addition to their finder’s fee.” And they say why? And my answer to that is, “Well, because if you fire them, you want it to hurt them, basically.” If you fire somebody that’s on 100 percent contingency, it really doesn’t matter. And, again, whichever deal is at the top of the pile, they’re going to serve a little nibble on the line. That’s what the finder is going to go after, right?

Mike Blake: [00:29:31] But that retainer gives you a little bit of skin in the game. If I’m that finder, if I want to keep that gravy train going to keep paying some of the bills in addition to that bonus I get at the end in terms of raising capital, then I need to be doing something every month to show that I’m earning that money. And I think that you do get and are entitled to more sustained, focused effort on your deal if you do pay a retainer.

Karen Rands: [00:29:59] Yeah. It’s shared risk. It’s a shared risk model. That company is risking some capital, some of their cash flow, or something for that. And the finder is risking not getting the money that it’s really worth for their time, and knowledge, and resources, if they don’t perform, if they’re not able to do that. And it becomes a really shared value model because you want that entrepreneur to fully disclose.

Karen Rands: [00:30:28] Because if you bring a real investor to the table and the deal gets blown because of something silly, or stupid, or something that wasn’t disclosed, then all that work that that finder did is for naught because the founder couldn’t close it, it’s a term structure, all kinds of stuff, your documents, everything about it becomes more of a win-win and a collaborative approach to finding the capital.

Karen Rands: [00:30:55] Because the SEC is really clear on what finders should not be doing. And that’s the stuff that gets in trouble when you have them do that stuff purely on commission and acting at stuff. And somebody that isn’t familiar with those rules can jeopardize the company in the long run.

Mike Blake: [00:31:13] Yeah. And those things include, for example, don’t talk about valuation, right? Don’t go around with a securities price because that’ll make something look like an offering, for sure.

Karen Rands: [00:31:24] Yeah. I mean, you can share the offerings, because that’s through due diligence. You know, you’re doing the introduction and once they’re qualified that they have an interest and they have the ability to invest, then you give them the offering memorandum that the lawyer developed or somebody else developed for that company to do.

Mike Blake: [00:31:46] So, we’ve talked about finder compensation, and it’s probably an unfair question but I’m going to ask it anyway because I think you can handle it. And that unfair question is, when you’ve encountered, or maybe worked with finders, or maybe you’ve been a finder yourself at some point in the past, what sort of fee should I expect to pay? You know, typically if it’s a percentage of the deal, what percentage of the deal is going to that finder typically?

Karen Rands: [00:32:14] So, the formula that they usually use is called a Lehman Formula – I’m not even exactly sure how you spell that.

Mike Blake: [00:32:24] Lehman Scale.

Karen Rands: [00:32:24] Lehman. Lehman. There you go. So, it’s typically the same sort of thing that says it’s five percent on the first million, four percent on the next one to two million, three percent on the next two to three, and two percent on everything above that.

Mike Blake: [00:32:38] Okay. And you find that’s fairly consistent in the marketplace?

Karen Rands: [00:32:42] Yeah. Because most finders don’t raise more than a million dollars. And so, they’re going for the five percent. And most entrepreneurs that are hiring a finder, they balk at a large amount. So, sometimes a finder, some of the quasi-angel groups that let companies pitch for a a success fee, they will have a straight up five percent kind of a thing.

Mike Blake: [00:33:11] You know, that’s interesting. I just haven’t followed that market enough, so I wasn’t aware. But what’s interesting is that, that’s actually cheaper than paying a broker dealer to sell an existing business, right? They’ll charge between eight to ten percent for a business with a value of about a million dollars. So, interesting. I would argue that being a finder isn’t actually harder but the fee is lower, so I’m surprised to hear that.

Karen Rands: [00:33:39] And the other thing about it is that, if that entrepreneur chooses not to pay the finder, there’s really no recourse. Because technically the finder, if they were operating as a broker dealer and trying to sell the deal, not under some of the ways that we couched it before, then they’re going to go to court and try to get their money. Particularly if there’s not a real contract of here’s a services that were being offered and why I’m being compensated other than finding capital, then they don’t really have it.

Karen Rands: [00:34:16] And then, they also have to judge if their fee was going to be like, say, they were going to collect, you know, $5,000. Well, is it worth going and hiring a lawyer to try to go get that? So, it’s a risky world for finders out there if they don’t have the right structure or they’re trying to really fly underneath the radar of what’s legal and not legal and in the gray area.

Mike Blake: [00:34:40] Yeah. And that brings up my next question, actually, which on the surface sounds weird, but given what you just described, I think it’s very apt. Are finder’s agreements typically in writing?

Karen Rands: [00:34:55] Yes. Yeah.

Mike Blake: [00:34:57] They are. Okay.

Karen Rands: [00:34:57] I mean, there’s some. Like, if you’re doing this to test the waters, then you’ll say, “I’ll put an agreement in place with you when I find this investor that wants to invest.” And you have a verbal agreement on the fees and stuff like that. And then, you’re really involved. But like in the case of, you know, if you’ve worked with them and you did do investments and it’s 60 days or 90 days is the minimum engagement for an exclusive on that. And an entrepreneur is willing to do an exclusive because they’re going to have this committed focus and compensation on these three months with that person that’s going to acquire investors for them.

Karen Rands: [00:35:46] At the end of that, you want to have something that’s a non- circumvent because deals take time. So, if somebody you invested that you introduced them to in month two, invest month six, you still want to get paid because it happened as a result of that, even if you weren’t getting paid in month four or five and six. And so, that’s where that nonpayment comes because they might continue to work with them.

Karen Rands: [00:36:09] And if you’re not staying in touch with both the investor and the entrepreneur – because the investor doesn’t know. The investor, you know, isn’t expecting that. And investors don’t like to pay finder’s fees. And that becomes a big problem on the investor side if a finder doesn’t disclose, that’s one of the no-no’s at the SEC. If you don’t disclose that you’re collecting a fee for that introduction, then that’s a no-no.

Mike Blake: [00:36:32] So, I’m glad you brought that up. That segues right into another question I want to make sure to ask, which was, my experience is that, at least angel investors don’t love finders, don’t love paying finder’s fees. You know, you have lot more experience, much broader experience, than I do. How do investors react to finder’s fees? You do have to disclose them, as is often the case in finance. You can do almost anything you want as long as you disclose it. How do investors react to this?

Karen Rands: [00:37:08] I mean, because it’s their money, and so it’s not disclosed as a use of funds and it’s five percent of their money. Then, that’s a big chunk out of that pie chart of whatever they said, you know, is their thing. Or they’ve got it on there, say, even when they do their performance. A line item, consulting fees – you know what I mean? If it’s not in there as a use of funds, then they are in effect. It’s no different than – well, it’s a little different, but it’s almost like buying a sailboat with the money. Five percent of their money because I feel like I’m going to take a tiki vacation or something, right?

Karen Rands: [00:37:42] And so, they don’t like it. Now, if that person is bringing value to the company, like we described where they’re helping them create their documents, they’re helping them figure out what their go-to market strategy is going to be, what their capital needs are going to be over time based on their cash flow, validating the cash flow, they’re doing all that stuff and helping find capital, they have no problem paying the fees. Because it made the deal more investable and it’s helping them get that deal scalable so that the investment that they put in is most likely to produce a return on investment.

Mike Blake: [00:38:22] So, we’ve talked about kind of the regulation around this, and under the best of circumstances, financial regulation is Byzantine around finders. It’s borderline maddening. But I guess the SEC has proposed a limited exemption for finders starting last year. Where is that? Is that still under consideration? And are you familiar with this limited exemption? And if so, can you comment on what might be the impact on capital finding if it is in fact enacted?

Karen Rands: [00:38:55] So, I think it’d be terrific. I think there’s still rules, they’re still gathering info on that. They usually take a while to do that. They took a long time on the Jobs Act to work all that stuff out. And I think in some states, they’ve gone ahead and said that people can work with finders in those state, particularly on intrastate exemptions, which is one of the offerings with the Jobs Act.

Karen Rands: [00:39:26] And most lawyers and accountants and those kind of people, because they’re licensed in a different area, they may do introductions, but they don’t take any compensation because it would jeopardize their license and their field of choice. But they have relationships. And people, for whatever reason, because they’ve been around in these areas. They’ve been somebody that has mentored folks because they’re successful business person and they’ve mentored this. Or they exited out of a deal and they have a bunch of investors that they had originally raised money for and all of that stuff.

Karen Rands: [00:40:09] So, I think it would really help to open up Rolodexes for people to register as a finder. So, you would be able to know who those people are, and probably at a state level. And then, you know, it would remove that additional barrier between companies and potential investors, and it becomes a two-way street for those investor people to find deals that they may not get through their limited funnel of how they they get access to deals now based on that. So, I think it is really good and I’m hoping it gets official here soon. If it hasn’t already. I haven’t heard that it is, and I think I would have heard, but I also haven’t gone out searching to see if I could legally become a finder in such a way.

Mike Blake: [00:40:57] Yeah. I don’t think it has. I had a false start. There’s one law firm that posted some sort of blog that implied that it was. But since I couldn’t verify with a second source, I did some more digging and it was just either I’m just going to give them the benefit of the doubt to say it was a badly written blog. I think it’s all out there.

Karen Rands: [00:41:17] So, like, I know Florida, their financial commissioner – I forget the official title – he is trying to rewrite legislation down there because of these limits that their interstate has. And for your listeners, an interstate exemption is when a company in a state can generally solicit to investors within that state, accredited and unaccredited. Usually, every state has their specific rules. But the SEC modified the Reg D504 exemption to allow companies to raise up to $5 million in their state. And that works really well for established businesses that want to franchise or want to do this stuff and reach out to people that may not be traditional angel investors.

Karen Rands: [00:41:58] And the way sometimes it’s written, because legislators don’t often understand business, they may have put rules in place that really cause more of a barrier than it. And one of the things is, like, requirements of certain financials, and requirements of certain history, and requirements of certain people in the business. And so, he’s trying to fix that and then also enable people to use finders, because that way it’s a low cost way without going through a broker dealer to get access to capitals on people’s Rolodex’s legally.

Mike Blake: [00:42:38] I’m talking with Karen Rands. And the topic is, Should I use a finder to raise capital? Let me pull a 180 here. Who shouldn’t use a finder? Who’s not a good candidate to use a finder or work with a finder?

Karen Rands: [00:42:52] Yeah. I really think it is the people that do. So, there’s this thing that happens a lot of times with entrepreneurs where they’ll go, “Those investors, they just don’t get it.” And the problem is, is that the reason why the investors don’t get it is because that entrepreneur doesn’t know how to communicate their unique value proposition. Or they have real gaps that an experienced investor sees as a red flag that’s going to not have that company be successful.

Karen Rands: [00:43:31] And if the attitude of the founder is, “I know everything. So, it’s just these stupid investors that don’t get it, I’m going to go get a finder to find me the the investors that do get it.” And the investors that do get it are ending up going to be people that don’t have that same knowledge and level and skill of those sophisticated investors that know to avoid that deal. So, those are the ones that then, when it goes south, are going to be the ones most impatient about getting their money back and most likely to cause a legal action against that company.

Karen Rands: [00:44:06] So, it all kind of centers around if a company is struggling to raise capital, then there’s something that they’re not doing right within their business, or the way that they’re approaching their capital, the way they’re not doing a license. Because you get general solicit investors. You could be your own finder and find investors just by advertising legally that you’re raising capital. And so, you need a finder if you do that, but that costs money, too. So, it’s people that are trying to avoid paying money for the knowledge and the experience and the effort it takes to raise capital. And it doesn’t usually work out that way in the long run very well.

Mike Blake: [00:44:48] So, not all of these stories end well, right? You may retain one or more finders who are ultimately not successful in raising capital. How easy or hard is it to terminate the relationship with that finder?

Karen Rands: [00:45:06] Well, if you don’t have an agreement, there’s nothing. Nothing gets done. There’s no skin on either side, so it really doesn’t matter. You can just forget them. If you have a contract, then there’s usually terms. There should be terms in the contract of how you would in that contract based on non-performance. And then, if the finder is savvy, they’ll have a provision for a non-circumvent on the ones that they did find it in there. And you just would go through the procedure, that might be a 30 day cure period or something like that.

Karen Rands: [00:45:49] You might need to unravel to reach out to the investors that they talked to, to make sure that finder doesn’t say something bad about you. You know, that would be a good thing to do to make sure you now established that relationship because you’re not going to be able to depend on that finder from following up with them. And so, that’s a big thing that you need to make sure you’ve got the relationship.

Karen Rands: [00:46:11] I mean, the entrepreneurs that make mistakes are the ones that are naive about the process of raising capital, the time and materials and effort it takes to do that. And they’re trying to outsource that. Or they don’t have the skills to talk to investors. So, you could hire a coach to help you with that stuff. I mean, I offer programming and I have offered programs for that. You know, you can learn how to raise capital and talk about your business. That’s the beauty of these incubators and accelerators. And there’s a gazillion of them. There’s like over 35 of them in Atlanta. So, you could go get help on learning how to raise capital and find investors yourself.

Karen Rands: [00:46:52] And then, just accept that it’s going to take time, like you said, two years. It’s going to take time to do that. So, do what you have to do. It’s really difficult sometimes to build a business and find capital. That’s why it becomes something that all of your team can work on as part of their assignments and be in the company vested in the company, finding capital, but not operating as an unlicensed finder.

Mike Blake: [00:47:19] You mentioned all the accelerators. Now, we go back long enough where there’s basically one accelerator in town. And it’s like the new state bird of Georgia, right? It’s the business accelerator, basically. This isn’t criticism by the way. It’s awesome.

Karen Rands: [00:47:35] Well, they’re not all created equal. So, you got to, also, as an entrepreneur, do a little due diligence to make sure that they’ve got the right skillset and community that’s right for your business.

Mike Blake: [00:47:48] So, a couple more questions before we let you go. I know you’re busy. I want to be respectful of your time. But can finders be used to find capital other than seed capital? Are finders ever used to find debt or SBA lending or a purchase order financing anything of that less conventional financing form?

Karen Rands: [00:48:10] Yes. They are. So, it’s interesting about that, because I actually asked the SEC about finders through VCs. And they came back in a noncommittal sort of way that VCs are [inaudible]. But, you know, it’s all capital that regulated by FINRA rules. Well, broker dealers are the only ones. VCs are not regulated by broker dealers. And there is no investor interest. Like, there’s no harm to investors because the investors that invest the VC funds, you’re not finding investors for the VC. You’re finding a VC for the company. So, the only thing that the SEC and FINRA care about are those investors and what they put their money in.

Karen Rands: [00:49:05] So, technically, you can use a finder to go find VCs and VCs oftentimes will have a core group of people they trust to source deals that they’ve worked with. They might have been entrepreneurs and residents. They might be companies that they previously invested in. Or they got to know professional as a result of that particular company that they had invested in so they have a relationship with them. And they will pay a fee to that person that brought them the deal. And they have an agreement on that.

Karen Rands: [00:49:40] So, finders can go to VCs, also SBA. You can go find loans for entrepreneurs because, again, it’s not investor capital. It’s not regulated by the SEC. You could go to family offices. You can go to private equity funds. You can go to all of those other types of capital and find capital for an entrepreneur and it not be subject to SEC regulations.

Mike Blake: [00:50:09] I’m glad I made time to ask that question, because I didn’t know any of that, so that’s awesome. Karen, we’re out of time and I’m sure there are questions that either our listeners wish we had gone into more depth with or questions we didn’t ask at all and they wish we had asked. If somebody wants to contact you to talk more about this, can they do so? And what’s the best way to do that?

Karen Rands: [00:50:31] Well, a best way to have a live conversation like this would be to go to my website, karenrands.co, I think it’s in your show notes. And on the contact page, fill out and you say I’m an entrepreneur, I’m an investor, whatever. And it will send you a confirmation email with a link to my calendar. And you can set up a half-hour call. If you want to just ask a question, you can hit me up on Twitter, @karen_rands. Everything’s Karen Rands. On Facebook, the best way would be @TheKarenRands. That’s my public business profile. And you can just put in a comment there or send me a message.

Karen Rands: [00:51:06] And I’m happy to have a conversation or a dialogue with anybody that has questions about this topic or any other topic when it comes to raising capital, or doing due diligence for trying to validate a deal because you don’t have time, you’re not part of an angel group, and you want to validate a deal, any of those kind of things. I’m all about the compassionate capitalism of getting more companies funded, more people educated, and how to do that so our economy becomes bulletproof.

Mike Blake: [00:51:33] Well, that’s going to wrap it up for today’s program, I’d like to thank Karen Rands so much for sharing her expertise with us.

Mike Blake: [00:51:40] We will be exploring a new topic each week, so please tune in so that when you’re faced with your next business decision, you have clear vision when making it. If you enjoy these podcasts, please consider leaving a review with your favorite podcast aggregator. It helps people find us that we can help them. If you like to engage with me on social media with My Chart of the Day and other content, I’m on LinkedIn as myself and @unblakeable on Facebook, Twitter, Clubhouse, and Instagram. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision podcast.