Major Issues in a Finder’s Fee Agreement
By: David Jay Mor | Posted: 12th April 2011
By David Jay Mor
www.mystartuplegaltemplates.com
If you are an entrepreneur, it is most likely that your top priority is to raise funds from angel investors or VC funds. Along the way, there is a good chance that you will come across a person that will offer you to introduce your company to investors and in return receive a finder’s fee. It is advisable to enter into an agreement to avoid any misunderstandings and disagreements. When entering into a finder’s fee agreement there are a number of key issues that usually come up and which will require your attention. In this article, we will review some of those issues.
What to look for in a Finder’s Fee Agreement?
1. A List of Qualified Investors. One of the key issues is to maintain your control as to who is a qualified investor that if you raise money from will allow the finder to be eligible for a finder’s fee. Qualified in this context relates to qualified under the agreement. As both you and the finder will continue to look for investors in parallel, that definition is important in order not to create duplicates and arguments as to who made the connection first and whether or not Finder is eligible for a fee. This is particularly true if you employ multiple finders. The best way to do it is to create an initial list of target investors as an Exhibit A to the agreement and continue to add more and more people to the list along the way via a written consent by you (which could be done via email). This way, the finder will contact you before approaching a new investor and you will maintain control as to whom the finder talks to.
2. Term for Qualified Investor. Qualified Investors as mentioned above should not remain as such forever. The agreement can also stipulate that in the event that no deal has been made with such qualified investor for a period of 6 or 12 months, that investor is no longer qualified for the purpose of the finder being eligible for a finder’s fee. This is intended to avoid a situation where the finder introduces you to an investor and a couple of years later when you talk to that investor about a different venture, the finder come up with a demand for a finder’s fee.
3. Term of Agreement. You should maintain the ability to terminate the agreement with a 30 day notice. A termination for convenience is important in the event you are not happy with the performance of the finder. From a finder’s perspective, it makes sense to insist that he/she will still be eligible for a finder’s fee in the event a transaction is closed with a qualified investor for a period of six to twelve months following termination. In this way, the finder guarantees that the termination right shall not be abused such that the company may terminate the agreement just before a deal is closed in order to avoid the payment of the finder’s fee.
4. Fees on Future Rounds. You should also consider whether the fee is payable to the Finder for a financing done by a qualified investor only in the first transaction or whether a fee is to be paid with respect to any future funds that the qualified investor may invest in the company in the future. As you know, investors in your company are likely to continue to invest and exercise their pre emptive right in future rounds of financing of the company. The agreement may limit for instance the fee to be paid to two rounds of financing only and reduce the fees in the second round.
If you are looking for a form of a Finder’s Fee Agreement which is suitable for start-up companies you can find one at www.mystartuplegaltemplates.com.
David Jay Mor is a member of www.mystartlegaltemplates.com; a web site dedicated to offering legal forms which are tailored for start-up companies
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Tags: money, good chance, angel investors, target, entrepreneur, top priority, 12 months, misunderstandings, new investor, disagreements