How Much Should You Pay a Capital Raiser In Your Fund? | Fund Equity Breakdown

Alright, people, welcome back to the channel. Today we're going to talk about how much should I pay a capital or money raiser? This is a question I get a lot, and so today we're going to dive into capital raising strategies, placement agents, broker-dealers, and bringing in partners to help you raise capital. If you're new to the channel, my name is Bridger Pennington. We talk all things funds and finance specific to investment funds, private equity, real estate, hedge funds, forex funds, the whole nine yards. We help people launch start and scale these types of funds. So with that beautiful intro, let's go to the iPad of truth and justice. Here we are. How much should I pay a capital raiser? Now, if you're a big fan of the channel, you've heard this before. The 3 circles of a fund. I should probably name this something just epic, but we're going to call it the 3 circles of a fund today. Over here on the left, you have your investor expert person. This person is a geek. They sit in the basement. They trade options all day. These guys are really, really good at investing. In the middle here, you have your fund manager. And over here on the right, you have your capital markets, your capital raiser. Now, Every single fund on planet Earth needs all 3 of these pieces. It can be 1 person that does all 3. It can be 2 people that share the roles. It can be 3 people. It could be 40 people. And each person has a sliver of one of these 3 things. That kind of making sense? It's important to note as well, when you're looking at this, which one am I lacking? Maybe you're really good at investing. You got really good properties or deals, or you have a great strategy, but you really don't know how to set up the fund. This is— and by the way, fund manager, this is compliance, legal, this is auditing, accounting, all goes into the fund manager role. And then finally over here, this is the capital raiser. This person is a natural-born salesperson. They're well-connected. They like the hobnob. They're at the parties. They're at the country clubs. You know these people? This is the group over here, these capital raisers. So today specifically, we're going to talk about how much do I pay capital raisers? Now I'm going to make a bold statement and I'm going to get an army of comments below. I want to make a disclaimer. Every business is different. I'm about to make a big statement, but every business is different. This is all negotiable. Who gets how much equity, how it's put together. But I've seen huge funds. We have a bunch of students that run $100 million, even billion-dollar funds. And I've seen funds all over the place with mentors and other people. It's crazy actually that I see this. Typically, even if there's 3 partners or 40 partners, about a third of the equity ends up here, a third of the equity ends up here, and a third of the equity ends up here. Now that's a general rule. Before you murder me in the comments, this— yes, it can be different. I've seen sometimes 50% of the equities here and you have 25 and 25. But when you're talking equity, I feel like a third, a third, a third is a good rule of thumb going into your fund. Now to clarify, this could be— there could be 2 individuals here, there could be 10 individuals here, and maybe there's 5 individuals here. Those 10 individuals would About a third, those 2 would share about a third, and those 5 would share about a third. That's what I mean by about a third is allocated to each bucket. And the other caveat that I got to make before everyone murders me in the comments is that a lot of roles are shared. Typically in a fund or any entrepreneurial venture, people help each other out. You're not just siloed. I only can think about this. I don't help with any capital raising. I never would help with any fund management. Typically partners help each other out. And if you have a partner, that doesn't want to help in other categories. Sometimes a toxic person to bring into your organization and maybe someone you don't want to partner with in the first place. Recently, I've been able to actually interview a number of these capital raiser types and actually very high-end, very successful capital raisers. And I've asked them, what do you like to see and what's worked in funds in the past when you're trying to bring on a capital partner? So we sat down and interviewed these guys. And the first thing that came up was this, and I've had this in my own funds. Every time you talk to a capital raiser type of person, they will always promise you, hey, I can go raise you $50 million or some crazy number. Oh yeah, that'd be easy. And they always talk it up. Oh yeah, I could, I could probably get you $100 million. Like, I totally get you $100 million. Because again, these guys are salesmen. They're always trying to sell you. They're trying to sell you to give them equity in your fund. So what do you do? Do you have them like earn that equity? Do you have a vesting schedule? What makes most sense? And when talking to these successful capital raisers, one strategy that's worked very well is this. Now, first off, vet them. Make sure they're going to be a good partner. Don't just give this deal to everybody. But once they're vetted, once they're ready to go, what I've seen work very Well, let's say, great, you can raise us $50 million. Awesome, that would fill up our entire fund. It's gonna be a $50 million capital raise fund. And for that, we believe we're gonna give you 25 or 30% of the equity in the fund, and we're gonna give that to you day one. Now again, this number can be different. It could be 10%, 15%, whatever. We're just gonna call it 30% for today's example. You seemed really confident on the $50 million. You have 12 months to raise us $50 million. And we're gonna set benchmarks every single quarter of those 12 months to make sure you're hitting those benchmarks. At the end of those benchmarks, And ultimately at the end of that year, you are subject to have clawbacks on this equity. Meaning if you only end up raising $25 million at the end of the year, your equity will be cut in half because you raised half the money down to 15%. Or if you only raise 10% of the money, let's say $5 million, you'll only get 10% of the equity. So you'd be down to 3%. And if you raise zero, you actually go all the way to zero. And if they try to renegotiate with you and get better terms, you say, hey, 5 minutes ago you were so confident you could You've raised us $50 million. This should be no problem for you. And all of a sudden their ego is now in the way of negotiating back with you and they can't backtrack on their own ego. Again, I've interviewed a lot of money raiser types and this is actually a really cool way to do it. Now again, I'll repeat this. If you're going to bring in a cap raiser, I would make sure that they are not only siloed to this thing. Yes, at the beginning they're going to help raise capital, but have the expectation of, hey, once this gets up and running, you're going to help out with a bunch of other stuff and we're going to have you do a lot of different things. We want to grow a big business, long-term lasting business for you. If I'm going to give up a I'm not going to sell a third of my company to you. We need you in all assets of the business. Now on to strategy number 2. I had one of my mentors actually told me that this is how they set up their first initial fund with partners. Because see, you have all these partners that all want equity. And usually in a fund, you get some big egos. That's just the world of finance. Everyone thinks they're the greatest thing since sliced bread and that they deserve 75% of the company. So he told me when they were setting up their funds, they had around 14 partners that they were going to have in their fund, and each one was going to fill a different piece of one of these roles, which 14 partners is quite a bit to bring together on an entrepreneurial venture. So what they did is they all negotiated together and they split up this pie, whatever they felt was fair for those partners. And they weren't all equal. It was different pies and slices for that. Each slice of the pie had a specific deliverable for a 12-month time period. At the end of 12 months, the other 13 partners would vote and decide if you had fulfilled your obligations on your sector of the business or not. And if there was a supermajority, I think it was like Let's call it 10 votes or above. You were subject to lose half of your equity at the end of 12 months if you did not fulfill those obligations. What this did was keep everyone very accountable to one another on their area and aspect of the business. And my mentor told me after the end of 12 months, everyone did good except for one partner. And the entire group voted and said, hey, this partner, he's had another business going on. He had other ventures, things like that. And they said, tough, like you didn't do what you say you're going to do. And actually that partner agreed. And said, yeah, I didn't really do what I was trying to do. They cut his equity in half. And then I believe on the next fund, he got a very small slice. And by fund 3, he was completely left out. This is a very cool way to structure if you have some big egos and big partners, because again, it puts their ego in front of the negotiation. Now finally, number 3, back to capital raising partners. You could give away the equity like I said before. However, you can hire professional capital raisers. You can hire broker-dealers, investment advisors, or registered Registered investment advisors and/or placement agents. These are professional money raisers that work for a fee or commission for raising money for you. Now, typically on a first-time fund, a lot of these types won't even accept you. However, there are a few of these placement agents that will accept you as an emerging fund manager and have clientele that like to get into emerging managers. Now, typically on a first-time fund, these types of fees range anywhere from, I would say, 2% to all the way as high as 10%. some scenarios, and this is of capital raised. So if they went out and raised you $10 million, you would be paying anywhere from $200,000 to $1 million for that capital, which is decently expensive. However, they get you the money that you wouldn't have had in the first place. As you grow and get bigger, these numbers can drop significantly. But I have seen traditionally around a 2-3% has been pretty decent for even large placement agents. So whether you're going to bring on a partner to help you with these 3 circles, or you're going to bring on a placement agent, or a mix of the 2, hopefully these are some good tips. Here's other videos if you wanna learn how to start and scale a fund, specifically on how to build a fund from scratch. Go check those other videos out. My name is Bridger Pennington. I'll see you guys later.