Help! My Advisor Wants 10% of the Company!
As you are getting your start-up going, you'll meet a number of folks that want to help. Some will be better than others. Some will help for free -- for a little while. But after that, they'll want to be paid. Some in cash. But more often -- in equity.
And some will ask for a lot -- even 10% of the company!
Let's step back. This isn't as shocking a request as it sounds. Even though it is crazy.
Imagine your advisor is pretty successful. She sold her last company for $500m, and made $20m or $50m or $100m. But still wants to help and be involved.
If you give her 0.5%, or 0.25% (typical high value, but very early-stage advisor grants) ... how will that impact her economically?
Say after 3 rounds of financing, that 0.25% is diluted to 0.15%.
And then you kill it. Just kill it. And this advisor puts a huge amount of her social capital in to help you. Gets you funded. Gets you customers. VPs. etc.
And you sell for $150,000,000. A rare and amazing exit ( 50 a year in tech).
Well, your advisor makes $225,000. After seriously investing her brand, time, etc. in you.
Not worth it. At least, not just for the money. That's not even 1% of her net worth.
But 10% ... that's worth it.
....
OK, so at least understand even though the answer of course, of course, has to be No -- there's no way you can give an advisor 10%, or likely, even 1-2% ... it may not be as crazy as it sounds.
So what do you do?
Well, you can't pay these advisors "properly". You just can't.
So do what you can. Do the best you can. Offer her the high end of normal -- whatever you can. Vest it over 2 years in case she flakes. Let her invest as much as she wants, within reason, in the next round.
Be grateful.
Offer the best package you can. And see where it goes.
CEO at OpsHub, Inc., Mentor/Advisor
8 年One key to ask is, whether this person is a consultant or a mentor. Mentors are looking to pay it forward and not doing it as a business transaction. Any mentor who wants 10% of the company is not working in that spirit and one should run away from such mentors. If the person is going to be a consultant, then their compensation is driven by the value they can generate and the cost of next best alternative (who else can provide you with similar services and what they cost) vs. the value of equity (and cash) being asked. In such cases one may want to tie the compensation to performance (e.g. meeting of some milestones). In case of consultants, their net worth has no relevance to compensation discussion.
VP, Software Transformation @ CommScope | BA in Economics
8 年Jason the supposition that an advisor puts a huge amount of her social capital to work is the important point to me. If anyone works that hard to get you company over-the-line you need to recognize them. Conversely if an advisor is not delivering much value try to move them aside and find someone like Jason is describing. Nice article!
Founder & CEO, PerformLine; Founder of COMPLY Conferences WE ARE HIRING!!!
8 年Don't do this founders. Jason, I am typically a huge fan of your guidance and thought leadership. You are an expert and have the wins to back it up. But I have a problem with this one. Let me count the ways; First off, it is so unlikely that an advisor who is not on your full time team, and likely is helping several companies along with their primary venture of the moment, that they will be able to provide the level of time and effort to warrant more then the typical convention for grant range. Secondly, your investors assuming they are somewhat experienced will have a really hard time with this. They are shooting for 20-30% of ownership at your A, they want an ESOP to be 10-12% to be able to attract top talent, leaving 60% for the founders. There is much more dilution to come in future rounds. Assuming you will have multiple advisors to help you with different blind spots through each stage of your business how can you afford to go well beyond a point or two with part time help? Lastly, why should you care about your advisors net worth in relation to what you need to do to make your business big and successful? If they want to help and they can, it's because of the want to help you the founder. Not because they may add a hundred K to the bank account. Sure that is nice reward for their help, but it shouldn't be the motivating factor. If it is they should be considered investors and not advisors. Advisors can be helpful and should be compensated but keep their level of effort in perspective and don't think twice about their Net Worth. You have your own story to write!