So a friend was intro’d to a company. He secured a high-commission outsourced sales agreement with them to potentially sell their product.
They also asked him to try to raise their seed round.
He asked me for help closing a customer. And we agreed I would take 40% of the sales commission he gets for that company.
But the work is entirely on me.
Then I raised them their $1.4m seed round, and gave him 60% of the fees from that.
Now they want to raise $15m and I have now sourced a potential dozen customers.
I think there is no reason I should be paying my friend a commission. I am operating on my own leads, paying my own bills related to traveling to talk to these companies, there are no leads, no infrastructure, no reputation he is lending me to aid in my doing business. And I am going to raise the entirety of the $15m and think it would be ridiculous to give him $500k simply for having intro’d me 2 years ago to this company.
The one area he does bring a benefit is that the sales commission he negotiated is very high, so maybe negotiating to like 75/25 there makes sense. Because it’s more than what I would get at 100% commission of their other sales partnerships contracts.
What’s your advice/thoughts?
Thanks
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I’m getting a bunch of weird signals here. First, not only is a commission on a raise a red flag, but the CEO not raising is a serious red flag. Maybe you’re talking about equity crowdfunding? Or this is a very specific industry where it’s common? But in tech it’s essentially unheard of.
I’m also confused as to how you can play a substantial role in raising a seed round yet a formal relationship between you and the company doesn’t happen before a series A.
In any case, you just learned a valuable lesson on leverage. If you’re bringing value to the table that isn’t easily replaced, leverage that to get what you want. Your leads are insanely valuable. More valuable than the money you will be paid for them. Leverage them.
Its not a tech venture. Its a physical product.
The CEO tried to raise, he just didnt get good offers.
I brought in 100% of the seed round.
I will be bringing in 100% of the Series A.
I will be sourcing all of the deals for my sales. No like platform or anything is provided to me. He negotiated a great sales commission contract under which I can operate, but I see a lot of disincentive to operate at 50% commission. I would pay him into perpetuity.
As far as the finders fee, we did the same thing an IB would do. And we didn’t even take a cut of the deal. We took 8% of the value as equity in the company.
What you are doing sounds borderline illegal. Taking 40% from a company’s seed round?!!! Criminal imo
It seems like for the seed round raise he was the point man, whereas now you have established yourself as the fundraiser and shown you can deliver. He made the introduction, this one should be all yours. Maybe offer 10% or something to make it go smoother
Don’t listen to the majority of posts here. Finders fees are the norm and I wouldn’t give him alot. He can’t expect the split in perpetuity. What if there’s a raise 5 years after the intro, 10 years.
Take this one yourself or if you feel bad, give him a token of goodwill but by all means take the lionsshare for yourself
Venture attorney here but not your attorney Not to be an enormous buzzkill but you may want to check the securities exemption your company relied on and the relevant solicitation rules.
This may be covered in the original agreement. I likely carries some terms forward. With this in mind, you can start renegotiation talks.
I am so confused by this entire structure. A diagram would be seriously helpful to understand who has contracts with whom and how money / commissions are flowing.
Does the company know about the subcontracted relationship here? How many other people are in the company?
Assuming this is in the US, assisting a capital raise for a commission requires the finder be FINRA registered and CA, DE, and many others require registration as a “broker” or “finder” in addition to extra blue sky reporting.
Aware of the capital raise rules. Are we not also all aware that every day every major company in the US violates a dozen laws?
Anyway. The company has a sales agreement with Jerry, he takes 30% of the gross margin, which is much higher than what they give all the other sales organizations they outsource to. I get 40% of that, so about 13%. But its entirely on me to source companies, close em etc. There is no support system for me… the only value Jerry provides is that I can work under his sales agreement.
Then Jerry took 60% of what I raised for the seed round. He wants to take the same for the series A. I think I should give him 0% of the Series A. And maybe 25% of whatever I generate in commissions. And that 25% because he bring a high commission contract I wouldnt otherwise get on my own.
Something something two wrongs etc …
Just so I’m clear, outside investors gave you $1.5M to buy equity in the company, expecting that the company would use that to grow, and Jerry pocketed $900K? And now you have investors buying $15M of equity in the company, again assuming their money will go towards growing the company, and Jerry wants to pocket $9,000,000?
If what you’re saying is true, don’t you have ALL of the leverage? Like go have a conversation with all parties telling them what you want to happen. The company has to know about you… You can’t raise blindly. There’s due diligence and a million other variables for them not to know what you are doing. I’m surprised they haven’t come to you directly at this point already. Only thing I can imagine is that you’re either missing something big time or blowing smoke up our ass.
There’s no way a CEO is letting you raise on their behalf without knowing you.
This doesn’t add up at all. I can see how the first commission and finders fee might be possible if the funding is friends and family. But no way any VC will agree to the deal if they know there’s a finders fee. Esp at $15M and anyone who can raise $15M for a company they’re not a a part of wouldn’t be asking these questions on reddit.
Yup what this person is doing is fraud.
I don’t think you’ve been around the block enough if you believe this
I started the first influencer marketing agency and sold in 2020. Working on my third start up.
I’ve heard of agents in private equity but not venture capital.
That’s what I mean. I’ve been a part of over hundreds of raises both public and private. Finders is not unusual to be paid and is very common. Many people build strategies around them to align strategic people early on.
If I placed 1M from my network into a startup that wasn’t mine, there’s no way I’m leaving 80-100k on the table. Many businesses will try to pay as much of it in shares rather than cash.