Almost weekly, I hear about capital seekers who have paid "earnest money" to a money finder only to have the mysterious investors or lenders pull out at the last moment. In most cases, they kiss their money good-bye and are left poorer than they were before talking to the money broker or finder.
Earnest money makes no sense in capital raising situations because of the direction of the cash flows. Think about it this way, if you are interested in buying a piece of real estate, would you ask the seller to give you earnest money? No, you wouldn't because it makes no sense. If you were considering buying a car, would you ask the dealership to give you money while you thought about it? No, you would not. In both cases, the seller would laugh you off his property.
In buying situations, the cash flows all flow from buyer to seller.
So why should an investor or lender (i.e., the "buyer" of your stock or note, respectively) ask you, the seller, for money? It doesn't make any sense, does it, when you think of it this way?
Earnest money is supposed to serve as proof that the buyer has the financial strength to make the purchase and is serious enough about it to put some money down upfront. In contrast, the seller (i.e., capital seeker) can't be expected to put up money.
So, the bottom line is that you are pretty much assured that you are dealing with a conman if you hear a request for earnest money.
Don't fall for it.
Legitimate money finders are almost as scare as hen's teeth. The few that do exist agree to be paid by you after the deal is done and the funds are resting safely in your bank account. If the funding isn't raised, they expect to receive nothing.
However, even if you do find a legitimate money finder, be aware that investors don't like to see 5 or 10% of their money go to the finder instead of you. Investors want to provide the precise amount needed so that you can make money for them and not a penny more. They tend to view money raising as a task best handled by the entrepreneur and his team. This is especially true of venture capitalists.
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