Beware of Venture Capital Brokers
Venture Capital Brokers (a.k.a., Money Middle-men, Money Finders)
What is a Venture Capital Broker?
A venture capital broker is someone who offers to raise venture capital on behalf of a client company. They do not invest their own money. Rather they promise to raise capital for your company and expect to be paid a fee for their services. As a result, it’s best to utilize the services of a broker who won’t ask to be paid unless he is successful in raising any capital. Never pay up-front fees of any kind to middle-men.
Dealing with a venture capital brokers requires extreme care so as to insure that you are not swindled.
Scams To Watch Out For: The Up-Front Fee & Agreement Scam
If you are talking to venture capital brokers, you will most likely be asked to pay a large up-front fee before any financing has been secured. This is their way of testing to see if you’re what is technically called a “sucker” or “rube”.
The broker may call it a finders fee, processing fee, placement fee, or credit application fee. To maximize your probability of following through the broker will ensure that you have first sunk significant time and effort into the deal. Before being asked for any fees you will be required to complete a mountain of paper work which will includes credit applications, references, co-signers, as well as undergo numerous interviews with the broker, while the mystery investor or lender remains anonymous.
Once you have invested substantial time and effort into the application process, you will hear back from the broker that the financing is in place but that you must first purchase insurance to insure the loan or the financing. This is the insurance fee scam.
Even though you will be told the fee is completely refundable if the financing falls through, you will have trouble recovering it. A court judgment against the broker will do you no good if he lacks the assets to pay you back. Rest assured that his “firm” will always turn out to be asset-less.
There are thousands of con-men who make their living by extracting these fraudulent fees from businesses desperate for capital. They will use agreements with unconditional clauses buried deep in the fine print which leave you with no escape recourse once the bad news comes in that your deal has fallen through. The agreements will contain hundreds of reasons why you can be denied independent financing under the contact and still be legally bound to pay the broker’s fees.
This processing fee scam has gotten so bad there has been new legislation written in many States and Provinces to protect consumers from them. This scam is most commonly found in the mortgage broker and loan broker field.
To protect yourself do the following at the outset:
– Ask the broker for at least ten references. These are to be companies which he raised money for. Be sure to call these references and verify his claims.
– Be leery of brokers who use free email services such as Yahoo or Hotmail or even AOL. Legit service providers should have their own domains.
– If the broker looks legit insist that any and all fees be held by your lawyer until the funds are securely in your bank account.