As a startup mentor, that’s the start of the all too common question from founders trying to figure out if they should part with equity to get someone involved.
As a venture partner, that’s a reflection of what too many startups are offered and it’s a turn of the phrase that ranks right up there with some of the more horrific aspects of humanity.
How, I’m asking you, how can we accelerate our education of entrepreneurs and future generations so as to help kill off this predatory kind of offer? How might we enable founders to know how to not get screwed by people in our economy who are setting them up for failure under a sheep’s clothing of support?
You can of course do whatever you want. It’s your company.
If it were me, I’d tell the “VC” to take a walk off a short pier.
That’s a predator.
Some thoughts to just ponder, take it for what it’s worth…
“Advisors” NEVER get 6%
That’s an insane percentage.
Yes: decimal point two five percent.
And that vests (they don’t get it all at once) because they have to earn it.
A Venture Capitalist would know this.
A VC would warn you of how bad an idea it is to allocate so much anyone who isn’t full time.
Let’s me reiterate that and intentionally put that in quotes because of it means: a “VC” wouldn’t expect equity to advise.
So, of this version of the question I was asked, you can do whatever you want. I’d highly advise (and notice, I’m advising without any equity 😉 ), that you move on. And, if not explicit in my language, I’d love for you to tell this “VC” to go to hell for taking advantage of founders, and for lying to people and calling themselves a VC. Best case, he’s an inexperienced business investor who wants the personal benefit of publicly appearing to be helping startups, while taking advantage of you in the process.
Feel free to send him this as your reply.
How might you think so that you can avoid this kind of crap in the future?
An early startup really doesn’t have what’s called a “valuation.” Yes, for those of you that know all about this, we do establish a valuation and it’s part of the funding process; instead appreciate, for the sake of my point, that as a brand new venture, it’s really impossible to say what the business is worth.
And that’s an important thing to appreciate because YOUR work as a founder, and that equity asked or offered, is worth SOMETHING. So… what??
At the end of the day, a startup is not worth much not because of whatever revenue you might have or what it cost to build it; startups aren’t worth much in the early days because of the rate of failure.
Point being, it’s valuable to appreciate that what your startup is worth is YOU, at this stage. And you have great value. It’s worth the potential.
What founders should value is their “investment.”
For example, two founders working full time for a year is a $500k investment. Why $500k? Because regardless of what you actually get paid in your job, regardless of what it might cost to do what you’re doing, IF this venture is successful, you are essentially a Chief Executive (CEO, CMO, or CTO of this company) and it’s fair to say that that market value is at least low six figures. So, co-founders, $250k per per year, that’s $500k “invested” on your part (not technically invested, I just want you to think this way).
Now, why is 5% insane for someone only advising? Or introducing you to investors? Or giving you office space? Or the like…
5% of $500k of your value, is $25,000 of value.
Obviously, I’m oversimplifying things – this is a quick mental trick so that you can be confident of having these kinds of conversations with people.
Value yourself and your time: that is an investment.
So, the question is not “what are you worth?” the question is “what is the value?”
You might only be worth, in a job, $60k a year. That’s irrelevant because that’s your opportunity cost of working full time on a startup.
It’s also not what you would get paid in this role! Say your startup can only manage to pay you $50k (heck, if that even), well that’s not your actual value either!
You and your cofounder, putting in all your time to a venture, meaning you at effectively the CEO/CTO/CMO of a company, even though you’re not actually there yet; that’s that measure of *value*
$250k each per year = $500k
Now. That isn’t “the valuation” of the company! That isn’t what you actually are worth or get paid!
It’s a simple math logic to help you make these decisions and negotiate.
So now you can go…
1% equity… That’s worth… $5000 of value.
Early VP hires at a seed stage startup typically get 5-10% plus some compensation. Why? Well, 10% of our math is $50k. And that sounds about right for a VP.
And NOW you can negotiate from there because there are many variables… How does that vest? What are they worth worth to you? What are you paying, or not? How substantial and valuable might the company become? Adjust the number accordingly.
Hence this 5% example: $25k of your $500k commitment and value.
Would you pay an advisor $25,000? I hope not.
Would you give that away for a Coworking desk? I would hope not.
Would you allocate it to a Marketing Director? Ah! I would hope so because $25k of value for a Marketer who knows what they’re doing, makes sense.
And appreciate that it works even as 1 founder, or 3… $250k of value as 1 founder. Would you give an advisor 5% or $12,500? Heck no.
But, since only one of you, there is less overall value so might you give that advisor MORE than if the advisor is coming in with 3 founders? I would.
$25,000 is a full time overseas front end dev. $25,000 is a part time sales person, content marketer, etc. $25,000 in value is what a *great* incubator is worth.
But to get advice, to get access, to get office hours, to get connections… What are such things worth? Never so much as a startup.
.25% to an Advisor who KNOWS what they’re doing, and can validate what you’re doing (actually help and increase the likelihood of success), knows your value and knows how their advice can help make any amount of equity incredibly valuable – no legitimate and experienced servant of the startup ecosystem of our economy would take advantage of you. If it feels wrong, it probably is; learn the quick and dirty math of attributing value to the percentages and you might save yourself from trouble.
Quite a bit more on equity here, or if you want to chat and give an offer a sniff test, just let me know: