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.
Typically, advisors get .25-.5%
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??
If you want to learn more about startup valuations, check out this great piece from Khawaja Saud Masud.
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.
Follow?
So now you can go…
1% equity… That’s worth… $5000 of value.
Roughly.
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:
Even going on shark tank and getting millions of views only costs 5% haha
Excellent advice
Clearly the person acting isn’t a VC. They are a pretender wanting to be a VC. Said differently … they have no money to invest … and are a sham.
Freaking amen
Sounds like a good person to recommend the book Venture Deals to 🙂 Learning what the norms are of a process you haven’t gone through before is very handy.
I’ll give you a better deal: I’ll only take 3%! LoL! ?
And I’M not from Nigeria!
AMEN!
Alan Knitowski I’d take it a step further and say that if anyone approaches you and asks to be an advisor, they’re probably not worth whatever they’re asking for.
Who needs whom?
A startup should be finding the right person(s) they strategically need as their advisor and showing them why they want to get involved.
And then Paul’s .25% works.
Take a walk off a short pier, into a pool full of sharks, after we accidentally cut him.
The best one I read for the morning (I have read a lot considering I am at California right now, and still get up with Texas time)
Nice reply. I also encountered my fair share of what I thought were savvy investors. Not long ago I had one come to me and say “I will fund some further development for 30% of the company” (it was only $100k what I needed). That’s after I’ve been at it bootstrapping for a year.
The sad part is that founders do not understand the value of equity. To us in the beginning 10% here 20% there doesn’t have any real world correlation. We are ready to take almost any deal for little bit of help and that’s why we are so easy to take advantage off. I think the confusion comes from the fact that your company is not worth much in the beginning and we ARE SCARED to suggest 0.25% of almost nothing. We are scared that saying that will be perceived as inexperience itself.
Tomas Louda what would you say to someone who wanted 30% for 100K or 300k for that matter? There is always difference in what investor wants to value the company at and what the founders see the potential. Many investors argue about revenue or rather lack of in the beginning.
Sharsch to be honest I would seek advice from people like Paul or Ryan since Evey company is vastly different. That’s the issue right, there is not one good answer.
In my case I worked on it for a year, I know the sweat, blood I put in it and I created something that is growing. That puts the value and percentage into more perspective.
Now obviously starting from zero is different and the only guide there is is experience. If you don’t have it you have to develop a relationship with people that do and make them your cheerleaders. Helps is there for sure but it can’t help everyone.
In my instance the guy that gave me that offer I thanked him, worked on my shit to get more traction and came back to him after a while with a different proposition. In my mind I wanted to show him I actually have a good deal he can be part of not a shitty one where he gets screwed.
There much more experienced people here than me to speak to this though.
Paul – great reply!
“RUN”
Very common in Austin, I built out an MVP to start calling people out but didn’t want to take the personal risk. Maybe I’ll launch it anonymously soon.
sadly… i see this happening almost weekly here in Austin. total predators
Well said.
A yep. Never occurred to me that there was a need for this kind of education and public support until I moved here. We need to empower our community, our region of the world, to know why and how they can stand up against this kind of crap because it’s not acceptible. Predatory or even just bad or biased advice can handicap founders, stifle startups, and ultimately, that makes it harder for everyone.
Austin is full of these types in my experience. I’ve had very aggressive cold emails from 2 different parties over the last 5 months peddling such terms. The Venture scene in Austin is definitely a lot less mature than Silicon Valley, and I think this provides a vacuum of information where bullshit like this can develop. I’d like to see it get better, but it probably won’t without a larger Angel/VC presence in the area.
Interesting thought/perspective… There is discussion in economic development about the implications of evolution of News Media.
That is, that sure, a larger Angel/VC presence is part of it, just as it time (it takes time for.the existing good apples to see and deliver returns), but we’ve lost in the last 20 years, a tremendous amount of Local News Journalism.
Don’t misunderstand, we certainly still have great local journalists. It’s a broader observation that thanks to the internet, social media, citizen reporting, etc. most news consumption is now either sound bites or more macro news National and Global. News rooms have drastically cut editorial and journalism staff, and even when/where there is great journalism, it is far less seen and read than when we all got the local paper on our doorstep.
Net result either way: less informed locally.
How does that impact this?? Investigative Journalism is costly. It’s controversial. It’s risky in an era when the papers have to do whatever they can to survive, and that often means pandered and tempered investigation rather than hard hitting.
And the result of THAT is that there is no one investigating and calling out the bad, and even if there was few would read it all, and those that did, move on immediately to the next Trump tweet (so to speak).
Part of what made Silicon Valley thrive, not known to many, is TechCrunch, the Chronicle, and even the known tension between those reporters/journalists. That was right at the time when publishers still had all these experienced folks AND when Techcrunch has the major audience. So BOTH could meaningfully and valuably expose and explore the bad… Enabling the good to thrive.
Do we have that? I don’t think we do. Startup News today, in most cases, is recycled press releases and social media announcements. Not even the good, in innovation, is really explored in depth anywhere – the market, the trends, the industry, the investors, etc. We might get a great piece about a company or product but in a way that really investigates all that’s going on so that we all might learn from it? That’s rare.
The bullshit indeed develops in a vacuum. It’s the lack of information, transparency, and accountability that is that vacuum.
Love the cold e-mails on this that I receive. Appreciate your reply for sure. Crazyness out here.
If a VC is all you claim them to be, then isn’t their expertise worth whatever a person is willing to give up? Some people have great ideas, products or service but that’s all they have. A person with certain mastery of skills or connections may take that and help create a billion dollar company. There is no rule to say they have to have skin in the game to negotiate a deal. A wise person once said you are not paying for the 5 minutes it takes to do the job, you’re paying for the 15 yrs of experience let’s me do the job in 5 minutes. I think to some degree that could apply to this situation. The person isn’t giving up a piece of the company because the guy is putting in 50k(or what ever amount), he’s giving up a stake for whatever expertise he brings in. That being said the person would have to be vetted to help ensure they are capable of follow through.
I my experience, VCs are just money guys, that’s all they bring to the table. Your romantic version of what you claim they are not anything I’ve seen.(I do like near philanthropic, that made me laugh)
That is if I interpreted this whole thing right.
I think two things …
Either, your experience has been shitty. Sorry to hear that.
Or
You’re making my point… Lots of people say they are “VCs” but they’re not.
And that’s my reaction because you’re saying that VCs are just money guys. And that is not remotely true.
Just money people are banks. Or business investors.
I’m sitting, right now in fact, in our incubator and Ecliptic Capital and S3 are teaching. Sharing the exact same points… Their job is guiding you/us, advice, guidance. “We’re not banks, we’re looking for opportunities to invest AND build your company.”
And there is nothing romantic about my point of view, I speak from experience. I’ve raised a ton for startups, pitched investors hundreds of times, I’ve been doing what I do (this frankly) for about 20 years. And if you look at some of the other comments, they’re affirming my passion and anger about this… Tons of people in Texas are bullshit. They say they’re VC but they’re not. And I’m affirming, they’re not. They may say they are, but if they’re just writing a check to get some equity to focus on making you make money and get their return, they’re a$$hats who need to be called out. That’s not VC. That’s predatory.
We’ll just have to agree to disagree. Maybe your point is lost in interpretation to me. Peace be with you.
I didn’t even realize we were disagreeing. How do you think so?
I agree with everything said. And I’m noting that my definition of VC is precisely what most people think, nothing romanticing about it. Your experience has been that people saying they’re VCs is that they are only money guys, I’m sorry to hear that, it sounds like you’ve met a lot of those people that claim to be VCs but really only write checks.
Rob Greenwood this is so far over market rates it’s a joke. I think that’s the key. The best VCs in the world don’t come close to this.
If they are not willing to invest, no need to give them equity (unless they go get capital). If their advice is/was so good, they would put their money behind it…
How does one sort these kinds of situations out without knowing any better? I have been working on a business plan and my idea of the company I want to build for 15 plus years now and if someone that had experience with start up s and how the business world is ran, I would have said 6% is fine if gets my business going. The comment above has a great point about this. I have no experience in business at all. So with that I would need someone who could help me with the start from part of the business plan to connecting to larger pitch opportunities. This is one of the reason I joined this group and many more.
Loosely related thought in another comment thread… You keep asking. You never settle for an answer. I don’t care if you have Mark Cuban or Fred Wilson telling you an answer. Until YOU have success, NO ONE is right and no one knows, not even you.
So yes, be here. Build your network of people you can ask. Get on Quora and ask. Google the hell out of questions.
Every time. Every time you get guidance, ask everywhere if it’s right. Even if it seems right, it’s not right until it is.
Constantly ask more. Seek answers.
Spot on. And yes, I think “crotchety” is a word. Note that it’s different from “crochet-y” which is something else entirely…
If this VC in sheep’s clothing warrants even the Point 25 % for his yet unproven, sage advice, counsel, line of business expertise and/or rolodex.. i’s surely ask to see his CV/Resume AND ask for 3-5 client references… and as you recommend… be sure to have any equity vest over time to assure u are gaining value from the engagement.
Yeah especially using the “VC” title is sketchy…
Our Radical Equity Fund is still pending our first large fund with true LPs (we’re working on it), and even then we realized our **advise to invest** model best works taking 0% equity… if someone wanted more of our time/bring us in closer and secure that through 0.25-0.5% we’d be honored…
But as a **fund** we inherently secure equity by writing checks ?? $$
Love that our founders get this, but don’t doubt there are plenty of predators and prey out there…
Paul O’Brien this is such a great post, and the additional discussion/commentary is gold. Thank you for taking the time.
As I get older, I prefer “realist” rather than pessimist. If it walks and talks like a duck, it’s probably a duck.
What interests me most here… the weird belief in the value of universal labels.
This person asking for 6% is NOT a VC, because he/she is quite obviously not offering Capital. Just because he/she has past investments means fuck-all.
The economy we live in is more dynamic than ever, and therefore the labels we assign ourselves & others are more subjective than ever. Do your homework and focus as much as you can on the *results* you can achieve with the people you meet.
Sounds like a bad shark
caveat emptor
This is really scary to read. Indeed very predatory because early stage startups want that win. They’re tired of slogging through “no” and want to finally hear yes. If they hear, “no, but…” it could be just attractive enough to take the bait.
Spot on!
This is a great read….
Great read!
Incredibly important for founders entering the gauntlet of #VC.
Vetting is a two way street!
Agree with you Paul. Equity of 6% in ‘very early stage’ is absolutely Wrong!! This is a ‘vulture’ not a VC/Investor!! My POV!
Indeed. Now the challenge… This is incredibly prevalent, unfortunately, and while we can talk, write, and educate that it’s wrong, how might we turn the tables and do more to kill it off??
Can I share this?
By all means
So, I would never think to ask for 6% (additionally, I wouldn’t be an advisor for .5 or less). I am trying to think of a way that someone (even a VC) could justify 6 points. I guess, if someone came to me and I knew that I could get them their first 2-3 paying customers I might ask for 6% but other than that …meh …
Performance counts for an awful lot
I have been around the investor world for a long time and seen the predatory actions of plenty of scumbags who call themselves advisors…they prey on the ignorance and desperation of founders just trying to bring their dream to life. Big retainers to start the process of fundraising becomes a big loss, big percentages for “advisory” could actually prevent a true VC from dealing with you… please people, know what you are getting into and get advice if you don’t understand.
I wish more people made the names of these predatory VCs/ angels public to ward off other unsuspecting founders.
A lot of people talking about it; considering how to break this, frankly. For my part, I try to take the higher road and just do better. Granted, I get so pissed off about this I often can’t sleep at night… but I can’t think of an apropos way to fix this shit other than being better myself and socializing common conventions so others can avoid.
That’s crazy. For 6% there btter be cold, hard cashmoney on the table.
How much coin did this VC put in to ask for a percentage? Advice is worth something, sure… but is advice really worth long-terms somethings?
Sounds like “stone soup”, and the VC is bringing the so-called “soup stone” while expecting everyone else to contribute and thereby help make the soup actually worthwhile…
I’ve had a vc that after funding, provided me with one of their staff, for which they (tried to) charge me about 10% of the money they invested!
I simply never paid the invoices…it’s not likely they would sue themselves.
Holy hell, 6%. Why would anyone even entertain this idea?
Paul O’Brien At some point, founders need to take control of the narrative and speak up. There is a lot of fear-mongering propagated by some of these VCs – socializing conventions would go a long way to help them.
Desperation, lack of education, and if we’re being honest, snake oil people who have local credibility merely because they’ve accomplished something… simply put, when I have a startup, need help, and someone prominent is offering me a possibility in which I don’t know better…
We need to break it.
I agree, it needs to be stopped, but I also think of how much I’ve learned just by Googling, listening to podcasts, and reading a few books, and it has made it apparent what a horrible idea this would be, and that part of me thinks maybe the people who would fall for this aren’t cut out for entrepreneurship? I’m probably being too cynical.
Russell Yazbeck in fairness, in all the incubators I try to support, I’ve learned that people really don’t know what they don’t know. And when it comes to founders, people taking ALL of the risk, I’ve learned to err on the side of caution.
The only way we’re going to enable everyone (and I am somewhat referring to diversity and inclusion) to have such opportunities, is to teach. To appreciate that not everyone is raised or has access to the same experiences, mentors, and education. That their trying is among the most noble of efforts; they are entrepreneurs because they are determined to make something better. Hence, my tone: FUCK these people who take advantage of them.
Paul O’Brien again I agree, thanks for the insight. Fighting the good fight.
This says it all:
“That their trying is among the most noble of efforts; they are entrepreneurs because they are determined to make something better.”
lol the VC industrial complex at its finest. Thanks for fighting the good fight you crotchety old man
eh… careful that. There is no one legitimately in venture capital that would do this. This is WHY there is distrust of actual venture capital.
Use every opportunity to educate entrepreneurs, particularly those where this is their ‘1st Rodeo’ as as once ‘burned’, they won’t make this mistake a 2nd time!! My POV
Offer a percentage of the first X years of revenue up to $X
I agree with everyone however what if that advisor who claims to have experience truly does help your company to become something that you alone would not have been able to do. Create valuation, help with pitch deck, help with marketing ideas and strategies, shifts your mindset from small thinking to big thinking. They connect you with legal guidance to ensure that you are structured correctly and the helps you get funding and boom your off to the races.
So I would say choose carefully. Verify who they say they are. And be sure to have it vested and written down. No handshakes. They have a job to do and if they dont do it then they get little or nothing. Put your money where your mouth is.
I say this out of personal experience with this smartphone scenario. It’s been 4 years since that decision and we have done some amazing things and to this day I still call in her for advice and guidance. Everything from mergers to acquisition and now preparing for a Series A raise.
“What if”? That’s what advisors do. Your point is wonderfully made, choose carefully, but don’t let that overshadow that that work is still not 6%. I’ll take 1% of a venture I know I can turn into a $200MM business and exit, every day of the week. And cannibalizing the company so I can get more, at the expense of the founders taking all the risk, and team members who deserve it, is unconscionable.
Point blank, everything you listed is what you can expect of advisors. And advisors <1%
If you're allocating more (i.e. 6%) that's a job. Full time, vesting.
Paul’s right. There are rare advisors who may command slightly more, but it’s extraordinarily rare. Six percent is bananas, full stop.
Even experienced founding teams will get totally bananas offers such as this 6% to advise. The things I’ve seen have been nothing short of mind-boggling.
I know that 5 out of 6 companies fold soon soon without any success. Don’t know the ratio for startups. But let’s assume similar. So, VC/advisor would have to advise 30 startups hoping 5 will make it to a profitable exit. Let’s assume average exit is $5 million. So, he’d own 6%*5M*5=$1.5 million. And let’s assume he’d spend 100 hours per startup or 3000 total over few years. So that is $500/hour that he is expecting. Someone would have to be a real proven great expert to expect $100-200/hour pay. So, I’d say a) make sure the guy is a real expert in an area that is essential for your business (ip lawyer, sale/marketing expert, programmer); b) vest it over time/effort c) limit the ownership to 0.5%-1.5% depending on expected exit value of the enterprise etc.
5 out of 30 would be an insanely performance. Maybe 3 out of, with 1 big success. 90/10 and 10 is the conventional wisdom. Which is why anyone calling themselves an Angel Investor, who also isn’t capably and comfortably invested in 20+ startups, is probably full of it. The odd of any return on 20 startups is incredible small… Most Advisors aren’t in it for the money, Advising is paying it forward, not a job.
If the story is correct, way out of line. But I must say that sounds more akin to what you would hear from an M&A advisory firm and in that case it would be fairly typical (which is what made me think that there may have been some confusion or more to the story). The number is also akin to some the numbers promoted by start up incubators/whatevertheycallthemselvesthisyear. If that were the case, then it would be a choice for the founder(s). So if the VC firm was going to incubate the company then maybe that would be good for them, depending upon involvement, knowledge, support, and services being offered. To entertain that kind of equity for an adviser they would have to be Jim Clarke, Peter Thiel, Marc Andreessen and still offer some significant time commitment to the project.
Well said. Two thoughts. 1. As stated, a VC wouldn’t be asking for this to Advise, M&A stage or not. And I am presuming that since they have this question, it’s not that stage anyway as they’d have advisors if that were the case. 2. Indeed about incubators; unfortunately I’ve found, too many expect that just to get a desk, office hours, and “access” to a network or investors. If considering an incubator, make sure they are teaching you, working with you, and you’re getting something meaningful done, thanks to their resources and mentors. Never give up equity to join a club… especially when people will happily introduce and connect you for free.
Ok, so if the success rate is that low, then asking for 1%-2% might make sense. But only as adviser. There is a reason it is called “VENTURE CAPITAL”, not “VENTURE HUMAN CAPITAL”. If you are VC, you bring money to the table, other things being optional (connections, mentoring, control etc.)
You’re being too generous with the advisors. .25% is still too much unless the person is legitimately amazing at what they do and you’ve put some pretty strict parameters around the gives/gets. In most cases if you give more than that, you’ll regret it.
Correct, send em packing.
Exactly how much brain power is a VC gonna allocate to a project where they can’t loose any money?
No.
better wait to look for others who believe in the product/service.
If VC asks for 6% as advisor for early stage then give him 10% and ask him to be CEO and set the KPI that includes revenue, fund raising, etc. Set the vesting period to 4 years and 1 year cliff period …
I’d want to tell them to feck off but if they where John Doerr , Chamath etc I’d do it. Pretty convinced they wouldn’t though.
I concur with the cogent reply. It is important to have the right people on board-which means you need to dismiss 95% of the people you talk to about your project.
Ask him to personally throw in $25K and then make half of the equity milestone based—-tied to helping you raise your first $1M. If he really believes you’re that good, that shouldn’t make him uncomfortable.
Christ some people are sharks. 6% for advice is ludicrous.
Excellent advice mate and thanks for sharing – probably saved a lot of first time founders a lot of pain with this post.
Thanks. I’m getting burned out and pissed off meeting first time founders who aren’t prepared to deal with this crap. Hopefully it gives some the ammunition to fight back.
I really enjoyed this. It lead my down to write a post about a related topic… Just how hard it is to get someone out of a business once you hand them that much equity. https://www.masonpelt.com/partner-or-employee-with-extra-steps/
Paul O’Brien Totally agree. Just sent you a DM – would love to chat if you have some time free next week.
Holy shit. 6%. The correct answer to how much an advisor should ask for in equity is 0%. If they’re asking for it, they don’t deserve it.
Mid boggling is the right term. So is desperation…… Let’s talk soon….
I ?. Paul, it’s so absurd it feels like clickbait. You have too much integrity for that. So must be an @$$ VC that spent too much time reading Ayn Rand.
25-50 basis points with vesting.
Holding others in our community accountable for predatory behavior is the high road.
Thanks Paul for providing a reality check to the entitled class of investors who want the world for providing “advice” or self-described “expertise”.
Yah nothing bothers me more than to see all the shady people taking advantage of a founder or first employees. Let’s not forget, founders can be just as shady, probably because they’re acting on the pressure and bad advice they got from a shady investor. Can’t we just have ethical business dealings?
Bad move. In fact a red flag. The startup will be constantly asked as to why the VC is not investing. This will hurt not help.
Really good piece from @seobrien on early startups and advisors.
I once had an “advisor” tell me he expected 5% “to start” but expected to eventually be at 15% (or simply take a “non-diluting 30% of revenues to perpetuity”. There are some bad apples out there…
Thanks for sharing Jason Shuster because troublingly, I just had a conversation with a founder this week, in Austin, who was presented with a similar opportunity.
I’ve started telling founders to forward that article to such people, and to encourage them to come argue with me
I absolutely will.
Funny enough, this advisor was in Austin.
Maybe sell tickets to the arguments that ensue?
I’d be down…. I want some videos people’s reaction when someone like us says, “wait, you want 5% for your advice?? Are fracking nuts or just trying to screw founders??”
Unfortunately, I’ve seen a lot of rent-seeking in the “advisor” community in Austin. Particularly, people who act like gatekeepers to sources of capital. A couple names in particular seem to come up relatively often when people are telling me their horror stories. Frustrating.
I stumbled on this post and while I have to say Paul’s pieces are always thought provoking, a lot of the advice here seem to be too personal and one sided. Perhaps a bad experience Paul? 🙂
Either way in 2012. I started a company. Spoke to guy who claimed to take my company to the next level in very few words. I offered him a lot of equity. I figured 100% of 0 was worth 0. Long story short, the business grew and got acquired in 2016.
The first million the company made was from a partnership deal introduced by my advisor and many other good things that happened to the business was facilitated by my advisor. His advise covered everything From hiring to op decisions. I’ll also add that the company never raised a dime it’s first 3 years due to my advisors guidance. Our acquisition happened because of him too. Best decision of my life!
Every single business I’ve started after that (3 to be precise) has had advisors compensated generously in cash or equity and they’ve all lived up to it. With 2 of them ending up as cofounders/co directors.
My advice is. You know your business. You know your weaknesses. You know where you need the help. You can offer any portion of your company to anyone. Just make sure it’s tied to milestones and schedules if you don’t trust them. This protects you if advisors don’t do what they promised.
Also understand that your input matters in moving the company to the promised land. If you’re lazy and not proactive. Even 100x Mark Cubans and his billions of resource won’t help you.
I also know tons of early stage companies that have been propelled into great businesses through advisors. Just one contact or right move from an advisor could change your company’s story.
What’s the position of the football player who earns almost as much as the QB but is rarely seen doing much? And yet very valuable. Or the regularly benched soccer player who only step in when someone gets hurt and play the last 3-9min every game and is likely is score a goal or assist. But gets paid same as the other 90min players. Yes that’s your advisor.
Good luck to everyone hustling and killing it out there. Make decisions based on what you get out of it always if your input aligns.
Great advice always Paul. Just stating my own experience.
I went to a pitch session invited thru either Tx or SA Start-ups. The one “investor” showing interest wanted a retainer of $5000/mo. Of course, I never responded to him. OTOH, we came close to a deal with an investment banker (broker/dealer) where their fees were steep.
Appropriate reply, “Great, how long do you want to be retained? You can invest that amount and we’ll pay it back in that retainer while you work for us”
Any idiot that asks for that is, well, an idiot.
Welcome to Texas. Never occurred to me that it might be such a thing, let alone common, until I left the most VC flush corners of the world.