How Investment Banks Work With Startups: Sell-Side, Placement Agents and When You Need One

Most founders encounter investment banking exactly twice: once when someone offers to "help raise your round for a small percentage," and once when the company is being acquired and everyone suddenly agrees a banker is essential.

The first situation is frequently a legal problem. The second is frequently worth every dollar. Telling them apart requires understanding what banks actually do, how they are paid, and which activities require a licence.

This guide covers the tiers of the market, the sell-side and capital-raising processes, fee structures in detail, the engagement letter terms worth fighting over, and the unregistered-finder issue that catches founders every year.

1. What Investment Banks Actually Do

Strip away the mystique and an investment bank in the startup context performs four distinguishable services.

Sell-side M&A

Representing a company being sold. The bank prepares materials, builds and contacts a buyer list, runs a structured process with deadlines, manages diligence, and negotiates alongside your lawyers. The core product is competitive tension — the credible presence of alternatives.

Buy-side M&A

Representing an acquirer: identifying targets, approaching them discreetly, and advising on valuation and structure. Less common for startups, though increasingly relevant for well-funded companies rolling up smaller ones.

Private placements and capital raising

Acting as placement agent for an equity or debt round. More common at growth stage than at Series A, and standard for real estate sponsors, funds and later-stage companies raising from institutions they do not already know.

Fairness opinions and advisory

A written opinion that a transaction is financially fair to shareholders. Boards obtain these to discharge fiduciary duties, particularly where insiders sit on both sides of a deal — as in a recapitalization.

2. The Tiers, and Which One Will Take Your Call

• Bulge bracket — the global full-service firms. Relevant to startups at IPO scale or in acquisitions above roughly $500 million. Below that, you will not be a priority client.
• Middle market — firms specialising in transactions roughly in the $50 million to $500 million range. This is where most successful venture-backed exits actually land.
• Boutiques — small, sector-focused firms, often founded by senior bankers who left larger institutions. For a $20 to $150 million software exit, a boutique with deep vertical relationships will usually outperform a generalist.
• Regional and lower middle market — firms handling transactions from a few million upward, frequently serving founder-owned businesses rather than venture-backed ones.

Sector expertise matters more than brand at the smaller end. A banker who has sold four companies to the same three strategic acquirers in your category knows which corporate development lead actually returns calls, what those buyers paid last time, and where they are budget-constrained this quarter. That knowledge is the product.

3. How a Sell-Side Process Actually Runs

A typical process takes four to nine months from engagement to close.

1. Preparation (4–8 weeks). Financial model, confidential information memorandum, teaser, management presentation, and a populated data room. Bankers usually find and fix problems here — revenue recognition, customer concentration, missing contracts — which is a substantial and underrated part of the value.
2. Buyer list. Strategics and financial buyers, tiered by likelihood. You approve every name. Expect to argue about competitors: the tension between reaching the best buyer and revealing your position to a rival is real.
3. Outreach. Anonymous teaser, then NDA, then the full memorandum.
4. Indications of interest. Non-binding preliminary valuation ranges, used to narrow the field.
5. Management presentations. Shortlisted buyers meet the team.
6. Letters of intent. Buyers submit terms. This is the moment competitive tension pays for itself — or reveals that it never existed.
7. Exclusivity and confirmatory diligence (6–12 weeks). One buyer, deep diligence, purchase agreement negotiation. Leverage shifts to the buyer here, which is why the LOI must nail down as much as possible.
8. Signing and closing.

4. Fees, In Detail

Fee structures are conventional and negotiable at the margins.

Retainer

A monthly or upfront fee, commonly $10,000 to $50,000 a month for middle-market work, running for a defined period. It funds the bank's work regardless of outcome and filters out unserious clients. Insist it be creditable against the success fee — this is standard and often omitted from the first draft.

Success fee

The main event, a percentage of transaction value that scales down as the deal gets bigger. The traditional "Lehman formula" — 5% of the first million, 4% of the second, and so on — is largely historical; modern deals use a modified version at higher absolute levels.

Very roughly, for M&A: high single digits on deals of a few million, falling toward 2% to 5% in the tens of millions, and 1% to 2% or lower above $100 million. Placement agent fees for private capital raises typically run in the low-to-mid single digits of capital raised, with equity placements higher than debt.

Watch how "transaction value" is defined. Does it include assumed debt? Earnout payments that may never be paid? Retention packages for the founders, which are compensation rather than purchase price? Escrowed amounts that could be clawed back? Each of these can move the fee materially, and the definition is drafted by the bank.

Incentive tiers

A well-constructed fee accelerates above a threshold — for example, 2% up to $60 million and 5% on everything above. This aligns the bank with maximising price rather than simply closing. It is worth proposing, because bankers with no upside above a base case optimise for certainty rather than value.

The tail

The clause that generates the most disputes. It provides that if you close a transaction with any party the bank contacted, within a period after the engagement ends, the fee is still owed. Tails of 12 to 24 months are common.

Three things to negotiate: shorten the period; limit it to a written, agreed list of parties actually contacted rather than anyone the bank claims to have spoken to; and require that list to be delivered within a set number of days of termination.

5. The Unregistered Finder Problem

This is the section to read even if you skip the rest.

In the United States, a person who receives transaction-based compensation — a success fee, a percentage of capital raised — for effecting securities transactions generally must be registered as a broker-dealer, or be an associated person of one. Introducing investors to your round for a percentage of what they invest is exactly that activity.

Founders are approached constantly by "consultants" and "advisors" offering to raise capital for 5% to 10% of the round. Most are not registered. Using them creates concrete problems:

• Rescission rights. Securities sold through an unregistered broker may give investors the right to unwind the investment and get their money back, potentially for years.
• Disclosure and diligence. Your next round's counsel will ask how prior rounds were placed. An unregistered finder is a diligence finding that must be disclosed, and it can require a rescission offer to clean up.
• Enforcement exposure for the finder, and potential aiding-and-abetting exposure for the company.

The practical checks are simple. Ask for the firm's CRD number and look it up on FINRA BrokerCheck. Ask which registered broker-dealer the individual is associated with. If the answer is vague, that is your answer.

Legitimate alternatives exist: paying an advisor in equity on a standard advisor agreement for genuine advice rather than for introductions; paying flat consulting fees not tied to capital raised; or engaging an actual registered placement agent. The SEC has periodically considered a limited finders exemption and some states operate narrow regimes, but no broad federal exemption exists — so the default assumption should be that transaction-based compensation requires registration. Our guide to US fundraising exemptions covers the surrounding rules.

6. When You Need a Banker — and When You Do Not

Hire one when:

• You are selling the company and want more than one bidder. This is the strongest case by a distance.
• An unsolicited offer has arrived and you need to test whether it is a good price. A banker can quietly canvass alternatives in weeks.
• The transaction is complex — carve-outs, cross-border, regulated industries, multiple classes with conflicting interests.
• The management team cannot run a process and the business simultaneously. Running a sale badly while the numbers slip is the classic way to lose both.
• You are raising growth or structured capital from institutions outside your network.

You probably do not need one when:

• Raising a seed or Series A. Venture rounds are relationship-driven, investors are suspicious of intermediated deals at that stage, and the fee is better spent on runway. Build the pipeline yourself — our guide on building an investor pipeline covers the method.
• You have one committed strategic buyer, a price you are happy with, and a board that agrees. You may still want banker-quality advice, which some firms will provide on a fixed fee.
• The transaction is small enough that fees consume a meaningful share of proceeds.

7. Choosing and Engaging One

• Take founder references, not client lists. Ask specifically about deals that did not close and how the bank behaved.
• Establish who actually does the work. Senior bankers pitch; associates execute. Ask who attends every buyer call and get the staffing named in the engagement letter.
• Test the buyer list in the pitch. A bank that arrives with twenty specific names, the right corporate development contact at each, and a view on what each has paid recently is demonstrating exactly the asset you are buying.
• Negotiate exclusivity and termination. Exclusivity is normal; an indefinite term is not. Include a right to terminate on notice.
• Cap expenses and require pre-approval above a threshold.
• Have your own counsel review the engagement letter. It is a real contract with real money in it, and the first draft is written entirely for the bank.

Frequently Asked Questions

What is the difference between an investment bank and a business broker?

Broadly a matter of deal size and process. Business brokers handle smaller, often owner-operated businesses, frequently list them on marketplaces, and run lighter processes. Investment banks run confidential, targeted, competitive processes for larger transactions. Both should be registered where transaction-based compensation is involved.

Can we pay a banker in equity instead of cash?

Sometimes, in part. Warrants or equity components appear in placement agent arrangements. The registration analysis does not change — equity tied to a transaction is still transaction-based compensation.

Do we need a banker for a Series B or C?

Usually not, if you have a functioning investor network. Bankers become more common in growth rounds above roughly $50 million, structured financings, and situations where the company needs to reach institutions that do not do early-stage venture. Understanding how funds are structured tells you which of those investors your round can actually reach.

What does a fairness opinion cost and when do we need one?

Typically a fixed fee in the tens of thousands, independent of the transaction closing. Boards obtain them where conflicts exist — management participating in a buyout, insiders leading a recapitalization, or any deal where common shareholders may later question the board's judgement.

How early should we build banker relationships?

Long before you need one. Bankers in your sector track companies for years and will provide market intelligence for free, in the hope of the mandate later. An annual conversation with two or three costs nothing and means that when you do need a process, you already know who to call.

The Bottom Line

An investment bank is worth hiring when the value they create through competition exceeds their fee. In a sell-side process with multiple credible buyers, that is usually an easy calculation. In a seed round it is usually not.

Whatever you do, verify registration before anyone takes a percentage of capital raised. That single check prevents the most expensive avoidable mistake in this area.

Global Capital Network convenes investors, founders and the advisors who serve them at our investor events. If you are an investment bank or advisory firm looking to reach founders and capital allocators, talk to us about sponsoring or speaking.

This article is general information, not legal or financial advice. Broker-dealer registration analysis is fact-specific. Consult securities counsel before paying anyone transaction-based compensation.