To Fee or Not To Fee That Is The Big Question In Raising Capital

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/UCW/ – Whether you’re a privately held company or a publicly traded company, when raising capital you need to be aware of the pitfalls before its too late. Some companies will opt to hire a consultant to assist them with the raising of the capital, so these consultants may charge a retainer fee and possibly some type of expense fee.

I’ve heard ranges from as low as a couple of thousand per month to upfront fees of $30-$50,000 plus a monthly retainer. Keep in mind that there is no guarantee that you will get funded and these retainers are nonrefundable so companies that opt to go this route make sure that you know who you’re dealing with.

There are reputable consultants that do put a lot of effort into assuring that they can get you funded prior to executing a consulting agreement with a company but there are those that are not so reputable. Many consultants work on a success fee basis and that makes it easier for a private company to absorb as opposed to upfront fees. As a private company just be aware of some of the pitfalls and tell tale signs of throwing good money out the window without being fully informed.

In the realm of private equity fund raising, well that becomes another interesting situation. There are a number of “Placement Agents” that require upfront fees and retainers. Again I’ve heard them range anywhere from $3,000 per month to $10,000 per month on top of an upfront fee in some cases. This upfront fee I’ve seen range anywhere from $10,000 upwards of $50,000 or better, the thing about it is that again there is no guarantee that you will be funded.

Again there are reputable and solid placement agents that will work on a success fee basis, they evaluate whether they can secure the funding first or not before they execute an agreement for a raise. Granted there may be some minor upfront expenses but that is minimal compared to the retainers demanded by some groups and they may require a little more on the back end but it’s a better move.
Public companies have other tools to assist them with raising capital, granted mid cap companies and higher have more than enough legitimate resources to raise capital but what about the micro cap arena? These smaller companies with minimal revenue and assets in most cases leverage their stock to arrange funding for their company.

Now this is when the fun begins for micro cap companies, if they align with the wrong group they could get trapped in a PIPE deal, discounted convertible note deals, straight discounted stock deals and the list goes on. The beauty of this is that the consultant has their upfront and retainer fee already locked in and since there is no shortage of vulture capital laying in wait to do a discounted stock deal their job isn’t that hard.

Just to go behind the curtain and see what the Great Oz is doing, discounted stock means that more than likely those investors will be blowing out of the stock smoothly probably prior to the funding actually taking place. With convertible notes well those investors are pretty shrewd and depending on how the funding was made, they may demand a yield on those notes, which is in most cases. So what happens when you can’t pay with cash? Well of course you issue more stock to meet your obligations and the cycle continues until you potentially could lose control of your company, hey it happens more often than you think it does.

This isn’t a bashing article its more of a shedding some light on reality article, as I mentioned in the beginning there are consultants out there that actually perform and are worth their weight in fees but those consultants would be more likely to work on a success fee basis with a minimal upfront expense fee while getting more on the backend.

Those that are chasing the retainers more than the deals that they can get done, well those “Retainer Collectors” make it harder for smaller public or private companies to sift through the nonsense to get to the reality of the situation.

In your pursuit of raising capital just be aware of who you bring on board to help you achieve your fundraising goals, a better route would be partnering with an actual private equity firm.

Louis Velazquez
Falcon Global Acquisitions

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