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I am a co-founder of an advanced tech start-up. We are in the pre-financing stage. We are in negotiations with a Finder. The finder is knowledgeable about the industry and will play a role not only in making introductions, but as the operator of a separate organization which, on behalf of the investors, will provide advisory and audit services to ensure that the company in staying the course.

The proposed terms of the deal include both a contingency (cash) and up-front equity.

My question: Is up-front equity typical under any scenario?

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That depends, really, on where you are, who you know, what industry you are in, etc.

In the Silicon Valley startup scene, this would be considered a huge scam and a huge red flag, and I would tell you to flee as fast as you can. Someone claiming to be such a "finder" is almost certainly preying on stupid young entrepreneurs.

The real way this is done is that the "finder" works for free, just for the karma, and knowing that if you are successful at raising money, they will be allowed to put in a small portion of their own money as an angel investor alongside the big investor that they find. This aligns all interests correctly.

That said, I still hear about this old "finder" model in old economies with insufficiently advanced startup financing regimes (Europe, I'm looking at you!)

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Yes, I see some "consultants" here in Europe asking for money or equity up-front to "polish your business plan" or "introduce you to investors". But that's a scam anyway. – Filippo Diotalevi Feb 6 '11 at 14:25
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They will act for you and your interests now, then after the deal they will act for the investors interests? They get a slice of your cash and equity from you now, then after the deal they make sure they get a slice of the cashflow by providing other management services.

Talk about conflicts of interest! If you are ok with those issues then make sure you do some stringent due diligence. I too could be knowledgeable about your field in 15 minutes and know all the names to drop and anecdotes to tell. Ensure they have the cell phone numbers of people they 'know', not just email addresses.

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