Engaging a Finder or Placement Agent

Posted on October 19, 2017 by Hansen Babington

Founders wear many hats, and one of the most important is that of chief fundraiser. Many startups follow a well-trodden financing pathway. First, personal savings are utilized to get an idea off the ground. Next, well-heeled friends and family (so-called “angel” investors) are called on for contributions. Depending on a founder’s past experience (in related industries, or with other startups), there might be an existing network of sophisticated contacts to explore for additional investments. However, most companies—especially those developing highly regulated (read: biomed) or disruptive technologies (read: tech or similar companies with no developed market and no positive revenue)—eventually find themselves in a situation where the capital demands of a growing business exceed the company’s internal ability to source additional investment. What to do now?

Enter the finder or placement agent. These parties provide access to external capital sources (often in an industry-specific manner) and can potentially assist with developing “market” offering terms. A finder is a person who identifies prospective investors for an issuer but has no active role in negotiations and does not bind either party to a transaction. Finders are not typically registered as broker-dealers, and do not receive “transaction-based compensation.”

A placement agent, on the other hand, is registered as a broker-dealer and may, among other things, actively participate in the negotiation and structuring of an offering and receive transaction-based compensation. Broker-dealers are regulated specifically under federal and state laws, and also by a self-regulatory organization called FINRA. This regulatory framework gives broker-dealer clients the benefit of additional oversight.

Assuming a company reaches the point where it needs to access sophisticated capital sources and is unable to do so on its own, it will likely engage a placement agent. Choosing the right placement agent requires careful consideration. Many specialize in specific offering and industry types, and provide access to a range of related services such as M&A counterparty sourcing, underwriting, and banking services. When selecting a placement agent, a company should consider:

  • Industry or geographic focus and experience.
  • Strategic and institutional connections—is the broker-dealer tied in with VC and private equity partners?
  • Number and nature of successful offerings.
  • Size range and average size of these offerings.
  • Time taken to complete each offering.
  • History of regulatory compliance.
  • Exclusivity, duration of engagement, and termination rights.
  • Compensation structure.

A bit more on this last point… Finders and placement agents cost money. Finders often receive a fixed amount per investor, and placement agents get a fixed percentage of a raise as well as rights to receive equity in the company (remember, a placement agent, must be a registered broker-dealer to be compensated in this way). Depending on momentum, deal size and leverage, compensation and other terms can vary quite widely. That said, FINRA imposes caps on broker-dealer compensation for certain types of transactions, and, now more than ever, the fundraising market is liquid and transparently priced.

Engaging a finder or placement agent can be daunting, both in terms of information processing (how do I source, vet and engage someone?) and financially (another person to pay, another comp negotiation!). However, making the jump and using a professional to achieve fundraising goals and access strategic partners often proves to be a—if not the—crucial step that propels startups forward to the next level.