Investment banks come in a wide range of sizes and play different roles. Each can assist your company in different ways.

· Business Brokers. At one end of the investment banking industry is the business broker. These companies can assist you to either buy or sell a small business. Although business brokers sometimes are involved in larger transactions, transaction sizes typically are in the range of $50,000 to $1 million.

· Placement Agents. Placement agents assist companies to find investors. Typically, the investors are wealthy individuals and the deal sizes are in the range of $50,000 to $5 Million. Some placement agents work alone at home on one or two deals a year. Others are companies with many professionals, who do dozens of placements each year.

· Investment Banks. Investment banks typically perform the same functions as business brokers or placement agents, but focus on larger transactions, provide a higher degree of specialization and a wider range of services. In most cases, investment banks also either offer retail brokerage services and investment adviser services or are affiliated with a company that offers these services.

It's useful to think of three categories of investment banks: general purpose, regional and specialized. Regional investment banks focus on one section of the country. Specialized investment banks focus on one or several industries or types of deals. General Purpose investment banks usually are very large and offer a wide range of services worldwide.

Finding someone who can sell your deal can be almost as difficult as finding investors. If your company is very early stage and the amount to be raised is under $1 million, it's difficult to interest a professional investment banker, even at the smallest firms. Some individuals do raise seed capital for companies. Their success record is sporadic. Don't rely exclusively on any single informal agent and don't think the agent will sell your deal. Usually, finders only make introductions. You still have to personally sell investors on doing the deal. Always get your agreement with a finder in writing. Make sure your agreement clearly states you only have to pay if you close a deal and receive money.

Investment banks can assist your company to do the following:

· do an IPO or other public securities offering

· sell securities in a private placement to institutional investors at a higher price than venture capital investors will pay

· identify and assist you to negotiate a joint venture, strategic alliance or sale of your company with a Fortune 1000 company or their foreign equivalent

· identify smaller companies for your company to purchase in a roll-up or other acquisition strategy

· assist the founder to sell a block of stock to diversify assets

· implement a put/call strategy for the founders of a public company to manage the risk of holding most of their assets in a volatile young public company

· create a stronger trading market for your company's stock by issuing analyst reports or making a market in your company's stock

· create a public market for the stock of a private company by making a market in the stock on the OTC Bulletin Board

· issue a fairness opinion to help insulate a board of directors from liability in a securities or other transaction

Hiring the most prestigious investment banker doesn't necessarily translate into greater value or better service for your company. Value and service will generally depend on whether there is a good match between the strengths of the investment bank you use and the needs of your company. This underscores the need to interview and do your due diligence before you select an investment banker.

Selecting the right investment banker for your company will include factors such as the following:

· is the bank interested in companies of your size or in your size transaction?

· does the bank have an investment analyst who is recognized as being strong in your industry and will that analyst issue reports about your company?

· does the investment bank's customer base match the types of investors you are seeking (for example, retail vs. institutional investors or U.S. vs. international)?

· does the investment bank have a good record of supporting the market price after the transaction is over?

· is the investment bank strong in other financial services your company needs?

You need to do extensive due diligence before you hire an investment banker. Questions you should ask include the following:

· Who Will Sell Your Deal? The investment bankers you meet at the "pitch" are not necessarily the ones who will do the work. These senior bankers are very experienced and have impressive resumes. However, in many cases you will spend your time dealing with bankers who are a year or two out of business school. Ask to meet and interview the team. Also, ask the senior people to described exactly what roles they will play. Get the home and cell phone numbers of the senior people and use them as needed throughout the deal.

· Industry Experience. Ask what other companies the bankers have represented in your industry. Have them create a list with the type of deal for each industry client. Success in selling is increasingly dependent on knowledge about special industry markets and which investors are interested in each market. Don't make a decision based on a generic deals list that's not industry specific.

· Conflicts of Interest. Ask the bankers whether they represent any of your competitors. Ask them to check their data base. You may not want to educate them with your confidential information, if they're advising a competitor. Ask what happens to you if a larger competitor is doing a bigger deal and wants the banker to drop you. Get confirmation they will continue working for you.

· Registration. Investment bankers are subject to extensive government regulation. Most states require them to register with the state securities regulators. Many small placement agents and finders fail to register. Ask whether the banker is registered in all the states in which securities are to be sold. Check with the securities regulators about whether there have been any securities violations by the placement agent or finder.

· Clients. Ask for references to clients of the investment banker. Ask for references to both clients whose deal closed and clients whose deals did not close.

Investment bankers generally charge four types of fees: cash retainers, cash reimbursement of expenses, cash as a percentage of the transaction and equity compensation.

· Cash for Expenses. Some investment bankers charge expenses that exceed the actual expenses related to the transaction in the form of a fixed expense allowance that's not refundable even if the actual expenses are lower. A fixed expense allowance is usually a profit center for investment bankers and may be a way of charging a retainer fee without calling it a retainer fee.

· Retainers Some investment bankers charge a monthly cash retainer, as well as the percentage fee payable at closing. Usually the retainer can be applied as a credit that reduces the amount of the percentage fee payable at the closing. With the retainer, the investment banker reduces its risk by receiving some compensation whether or not a deal closes. Try to minimize the retainer part of the fee.

· Cash Fees. The cash fee paid upon the closing of the transaction is usually based on a percentage of the money raised in the offering or a percentage of the sales price of your company. Percentages vary from one deal to the next, but the range for a private placement is generally 5% to 10%. For larger deals, a "Lehman" formula is sometimes used, which charges a lower percentage as the amount raised increases. For example 5% of the first million dollars, 4% of the second million dollars, 3% of the third million, 2% of the fourth million and 1% above four million. The "Double Lehman" formula uses 10%, 8%, 6%, 4% and 2%. The dollar break points at which the percentage is reduced are negotiable and vary from one deal to the next.


· Equity Compensation. Most equity compensation paid to investment bankers is in the form of warrants. The warrants are generally for a number of shares equal to between 5% and 10% of the number of shares sold in the deal. The warrants usually have an exercise price equal to 100% to 120% of the price of the securities sold in the deal. Sometimes all or part of the cash fee is converted into stock.

Although investment banking fees for most transactions contain a combination of expense reimbursement, cash fee and warrants, the amount in each category of fees varies from deal to deal depending upon a number of factors, including the following:

· Size of the Deal. The general rule is the lower the dollar amount to be raised, the higher the percentage the investment banker receives. This is the case because the amount of time and effort it takes to raise $25 million is often not much more than it takes to raise $5 million.
· Stage of Company. With younger companies there is usually greater risk the deal will not close or will take unexpected effort by the investment banker. Therefore, bankers charge a higher fee.
· Industry. If your company is in a hot industry, the investment banker may agree to a lower fee because the deal will be easier to sell. Also, the warrants may be deemed to be more valuable.
· Market Factors. If a company has no other visible sources of funding, the fee will generally be higher than if other investment bankers are competing for your business or if the company's existing investors are willing to fund the company.

Although the size of the fee is important, it's often more important to assure that the fee is structured so that the investment banker has an incentive to get the deal closed on terms favorable to you. It may be in your interest, therefore, to agree to a percentage fee that is at the low end of the normal range, but to agree to a higher fee if at closing the deal meets specified valuation criteria. For example, 10% if the pre-money valuation at closing is twenty million or more and 5% if the pre-money valuation is less than $20 million.

The following provisions and issues arise in most investment banking agreements:

· Exclusivity. Most investment banks require exclusive rights to sell securities for a stated time period, generally in the range of three months to six months, but it can be longer. Although some freelance placement agents or brokers are willing to work on a nonexclusive basis, it's generally futile to attempt to get a reputable investment banker to agree to work on a nonexclusive basis. In some larger deals, similar to IPO's in scope, however, the deal may have a second investment banker or a co-manger.

· Term. Most contracts have a term of three months to one year. Being tied to a banker who is not producing can harm your company. You should seek to be able to terminate on thirty days notice.

· Tails. Most investment bankers insist on being paid for money received after their services are terminated, if it's raised from investors they introduced. This provision is called the "tail." The duration of the "tail" varies from one deal to another, but one year is the most common. In some cases (especially for longer tails), the investment banker's fee is reduced as time goes on.

· Company Investors. A company seeking to raise $10 million may know it can sell $2 million to existing investors or to potential investors it already knows. Investment bankers often seek to earn a fee on such sales. In many cases, however, they will agree to a reduced fee for these sales. In other cases, no fee is paid.

· Investor Selection Process. Control both the number and the nature of investors an investment banker contacts to sell your deal. The agreement should require the investment banker to contact only potential investors you have approved.

· Indemnification. Standard investment banking agreements require the company to indemnify the banker against any claim even if the banker was negligent. On the other hand, investment bankers usually do not indemnify companies for the banker's misdeeds. This may not seem fair or balanced, but it's standard and you just have to live with it.

· Follow on Deals. Investment bankers often seek the right to represent companies in later transactions, including a later IPO or sale of the company. Later, when a transaction occurs, the company may have to make economic concessions to the banker to obtain a waiver. In many cases, the banker can be persuaded to drop this provision.