Do we need a banker? part 2

September 19, 2006

Get up to speed on the story before reading our first post on Hiring a Banker

So I met with Mr. Banker about two weeks ago at this point to discuss our capital needs and how he might be able to help us raise some money. Given I understood and spoke the banking jargon, Seth and I decided that I would manage this process until we were ready to make a decision, upon which time Seth and I would decide together on the right path to take. I had never dealt with a start-up banker/consultant before, so this was a real education. The basics for how this works is that these bankers typically work alone and help start-ups or small companies with a variety of financial advice, such as M&A (i.e. selling their company), raising money, and general business development (i.e. finding partnerships), among other internal finance processes. Some will even offer to stand-in as CFO (chief financial officer) to ensure that the financial processes are in place and that the accounting is being done properly. Mr. Banker offered his services on all these levels.

I thought this was a great idea and asked him for a draft agreement so we could share it with our lawyers and get a general sense for how the economics (i.e. payment to him) would work.He sent me the paper work a day after we met (about a week ago), and I went through it with a fine-toothed comb. In short, I didn’t like the fee structure and thought it was going to be very expensive. There were fees for everything, but Mr. Banker mentioned that most of the compensation would be for stock in our company so that he can “share in the upside.” Seth and I liked this part because if he did a good job raising money for us on a good valuation (more on that in another post), he would also benefit from our stock being worth more. However, I come from a world of finance where clients paid bankers significantly less for a private placement. Although the size of our deal would be much lower, I did not feel comfortable paying 60% more than I was used to at a big investment bank.

I sent the agreement back and forth with Mr. Banker, making edits to the language and negotiating the terms.After working on this for two weeks, I was comfortable with the agreement and thought it provided us with adequate protections and fair fees. But then again, I’m not a lawyer. To be sure, I sent the agreement to our lawyer for final review and waited a couple days for him to get back to me.So he came back to me yesterday with a ton of notes and a lot of issues with the agreement. In short, he said that it was very unfriendly to the company and thought that we should not sign this agreement under any circumstances. He believed so strongly that we not sign the agreement that he was going to draft a letter to us stating his advice so that his view was documented should we go ahead and sign it anyway. I assured him that we were absolutely going to follow his sound legal advice. I spoke with Mr. Banker and told him that we could not sign the agreement. I told him that Seth and I would need to speak about this and would get back to him with an alternative next week. So I’m pretty sure that we are not going to hire a banker at this point, but I’ll let you know how this goes…

Bottom Line: Be very careful when hiring a banker to help you raise money. Don’t sign anything before having a corporate contract lawyer review it. This could be your uncle, cousin, brother, or the lawyer you hired because you don’t have anybody in your family who would do it for free. It doesn’t matter. Remember, that your signature is binding, and signing anything without fully understand it (especially in business) could be a huge mistake. Look for other sources of money first before hiring a banker, since other sources will probably be free and a banker will charge you a big fee for what he’s doing. If you decide to hire a banker, make sure the contract is completely performance-based. This means that he gets nothing if he can’t raise money, form partnerships, etc. This creates ultimate accountability for the baker. If the banker you’re talking with doesn’t like that, don’t hire him. Remember, hiring a banker does not mean that he will have your best interest in mind. He wants to raise you money so that he gets his fee. It doesn’t matter how much of your business he needs to sell to do it. So make sure you understand how much of your business you’re giving away when you’re banker brings you interested investors wanting to put in money. Everything comes at a price…

JT

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