Appropriate to ask for Equity for finding an investor?

Question

Is it appropriate to give away a 5% referral fee plus equity in my company? They are asking for 5% of whatever the investor gets: ie 30% would mean the referrer would get 1.5% of our company. What do you think?

Dror · Answer 1 · 2010-09-14 06:18:04Z

Let me start by saying that my answer relates to the US. In other parts of the world the attitude might be different.

No, it's not appropriate.

On the surface it makes sense since most entrepreneurs are desperate for investment that this seems like a small price to pay for it.

Investors hate seeing their money going towards referral fees. It doesn't help the company in any way, and it will harm the deal.
In the US, you actually can't do this legally without being registered as a broker. Most people offering to do this are not registered brokers.
Most people that really have access to investors, will provide introductions for free if they believe in your company
While this person might help with introductions, at the end of the day the investors want to talk and grill the team. You'll have to do most of the work.

It is appropriate to have an advisor that works with your company and helps you find investments. Usually these advisors will get 1% of the shares or less spread over 2 years or so.

*Never give money upfront to brokers. *

Just to add a note to this - I'm in the process of facilitating an investment. I advise the company in question re growing issues, and so benefit that way. There is no referral fee, and no shares that I'm being given for the investment per se, but by arranging the investment, I get other kickbacks in terms of development contracts and exclusivity on initial bids for projects.

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Appropriate to ask for Equity for finding an investor?

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