Question

Topic: Strategy

Introduction Fee

Posted by Anonymous on 8/11/2004 at 6:10 AM ET 50 Points
We are in the process of rasing capital at the moment and have had discussions with a number of Angels and VC's. We have also been approached by a reputable institution who have offered to introduce us to investors on a 'no foal no fee' basis. The fee they have suggested is 5%. This seems a bit on the high side. Any thoughts?
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  • Posted by Inbox_Interactive on 8/11/2004 at 7:47 AM Accepted
    As with most things in life, the answer is, "It depends."

    I used to do precisely what your institution is proposing to do, namely, put early-stage companies in front of angel and investment funds. Generally speaking, 5% is well within the realm of acceptable fees. It's certainly not out of line.

    Just so you'll have something to compare to, we used to charge fees based on what some call a "Lehman" scale, meaning we'd charge 5% on the first million, 4% on the next, 3% on the next, down to 1%. So, on a $4 million deal such as yours, you'd pay a blended rate of 3.5%, or $140,000.

    Keep in mind, though, that this was in addition to a fee for preparing the business plan and sometimes a monthly retainer. So, if your institution is not charging these fees, a 5% fee across the board might be reasonable.

    Is that $60,000 difference enough to worry about when deciding whether to work with them? My feeling is no, particularly in this market where funding appears to be hard to come by. This is even more true if the investment bank is helping set a fair valuation for the business; that $60,000 could be money well spent if you hang on to more of your equity.

    In summation, the 5% fee is not out of line. It would be nice to know that these guys are going to do more than make introductions; for 5% they should be "working" for you and really helping to market the deal. Also, if they're not going to really work their Rolodex for you (meaning you're still out there on your own trying to raise money from other angles), ensure that they don't have an exclusive on the deal. You want to be able to talk to other investors without having to pay a 5% commission to these guys for doing nothing.

    Above all else, be sure that these guys really are reputable and that they have a history of getting deals done. This business attracts many fakes and frauds (as well as people who are well intentioned but don't know anyone or anything).

    Good luck!

    Paul Broni
  • Posted by SRyan ;] on 8/11/2004 at 11:35 PM Member
    JH, if it were me, I'd run far, far away from them.

    All of the VCs that I know here believe that intermediaries are useless and that they sour the deal, period.

    If this institution has happy, REAL clients who you can talk to, then MAYBE it's worth considering. If they can't put you in touch with the happy entrepreneurs AND funders they've connected in the past, though... run away!!!

    ¤ Shelley ¤
  • Posted on 8/2/2010 at 3:52 PM Member
    Good afternoon Introduction Fee experts!

    I have two scenarios (two different products) I require professional guidance for. I’ll make these as short as possible.

    First scenario:

    I developed a pet safety product several years ago. I was looking for trustworthy pet product distributors and mentioned this in conversation to a dear friend. She introduced me to her cousin, a marketing rep. He introduced me to the President of a large pet product manufacturing company to see if she could recommend a distributor.

    Two years later, and as of 7/2/2010, I have successfully, on my own and using my own money, licensed my product (fully executed 5 year contract) with this company and with the guidance of a business attorney. Insert happy face here!

    I have not seen any monies but expect to receive my first royalty check this month. It could $5.00 ~ it could be $500,000.00! The latter of which I am wishing for of course! Insert happy face here ~ again!

    He has never asked for it, however, I would like to show my appreciation for introducing me to the President. What is a fair amount to pay him? Should it be a one-time payment or a percentage of my royalties and for how long?

    Second scenario:

    In addition to the pet safety product, I developed a child safety product. Another dear friend (and wife of my business attorney) showed my child product to a dear friend of theirs (Yes…I know. I have lots of dear friends. Am I blessed or what?!)

    He has expressed an interest in my product. This could potentially be huge!

    My dear friend is asking for an introduction fee. Yes, I wouldn’t have gotten it to this person without them. And again, I have produced and paid for (in full) myself. No investors, no monies owed, etc. on either products.

    She mentioned 25%. I stated that I would research how intro fees work and we would agree to something and put it in a contract.

    I thank you very much for your assistance.

    ~ Penny Townsend
  • Posted on 8/2/2010 at 4:09 PM Member
    I just saw that I posted as a "response" to J Hogan's question in error.
    My post is a question in need of responses.
    Sorry about that.
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