A finder’s agreement is a business contract between a company and a finder, who may be an individual or another company. The specifics of the agreement depend on a company’s needs. The goal for the company is to focus on other aspects of the company while a finder does the work needed to grow the business.
A company typically hires a finder to identify business opportunities such as:
- Acquiring additional financing
- Locating strategic partners
- Finding acquirers
- Identifying customers
A finder is paid according to the specifics of the contract and:
- How difficult it is to close each transaction
- The expected value of the transaction
- How unique the finder’s services are
The pay structure for a finder is often negotiated between the company and the finder, and then written out in detail in the finder’s agreement contract. Common pay structures in a finder’s agreement include:
- A percentage of any gross proceeds
- A set dollar amount paid at a specific time
- Equity compensation, which can vary from partial ownership in the company to merely receiving the benefits of phantom ownership
- A combination of the aforementioned forms of compensation
Phantom ownership is a term that refers to the finder receiving the financial privileges of being a partial owner of the company. However, the finder does not have any real power to make decisions with regard to the company or vote on the company board.
A company is not automatically required by law to reimburse the finder for any of the finder’s expenses. Any reimbursement for a finder’s expenses must be determined while negotiating the contract.
Negotiating any business contract is an incredibly important task. This is especially true with a contract as crucial to the company as an agreement with a finder. You should speak to a contract lawyer about negotiating a finder’s agreement. There are implications for both parties, including tax consequences, securities rules, and termination laws.