Founders Beware: True “Advisors” Don’t Ask for Free Equity

Posted on January 25, 2010. Filed under: startups, venture capital | Tags: , , , |

Fred Wilson wrote a post over the weekend about the importance of role models to early stage founders. The discussion around this post led to the subject of Advisors and Advisory Boards, and I thought I’d take a minute to shed some light on the bright and dark sides of startup advisors.  This post came on the heels of a meeting I had on Friday with a young entrepreneur here in New York with whom I was sharing some fundraising ideas.  At the end of the meeting, we agreed that I’d spend a little more time reviewing his pitch with him and maybe making some introductions to angels, to which he responded “okay, so let me know how you want to structure that and we’ll go from there?”  I asked what he was talking about, and it became clear that he expected to pay me for my advice/help.  I further learned that another now-well-known entrepreneur/investor here in New York (for whom I sort of had respect) had taken a piece of his equity in exchange for “formal advisory services,” and although I didn’t say anything at the time, I was thoroughly disgusted by this “advisor’s” behavior.

Here is my advice to startups trying to secure advice and mentorship from experienced entrepreneurs and executives: advice and guidance in our community is abundant and free…equity in your company is not. This is not to say that you shouldn’t use early equity as a form of compensation to get your company off the ground, but be watchful of the scenarios in which you do so:

Scenario 1 (Complete Bullshit): You meet with a guy/girl who you think could add a lot of value and/or credibility to your project.  At the end of the meeting, they say “I’d love to get involved.  Typically I’d look for 1-2% of a company at your stage, and that 1-2% gets you an hour of my time every week and some great introductions and relationships.”

Savvy founder’s response: Run for the hills.  This “advisor” is a complete predator.  The value they add will not be worth the equity they are asking for, but more importantly, they are trying to take advantage of your lack of experience in this world.  General rule of thumb: anyone who directly asks you for equity in your company without investment is a scumbag.  Stay away.

Scenario 2 (Better, but still not good): You meet a guy/girl who you think could add a lot of value and/or credibility to your project.  At the end of the meeting, they say, “Good luck, let me know if I can be helpful.”

Savvy founder’s response: Build a relationship with this person, continue to seek whatever amount of guidance they are willing to provide out of interest and belief in your project.  If you find you are asking more of them than they are able to give, perhaps offer them the opportunity to invest on favorable terms in your company.  If they believe in what you’re doing, and they have made enough money to part with $25-50K, they will be honored that you are asking…don’t be afraid to.  But, if they say no, don’t say “okay, can I give you some equity to be formally involved?”  If they aren’t going to pony up as an angel investor, a couple fractions of a point (point=1% of equity) is not going to incentivize them to go beyond what they are already willing to give in terms of time/advice/introductions.  Granted, if you make this offer and they accept, they are not a scum bag (as is the case in scenario 1, but the truly righteous and high quality mentors in our community will not accept your freebee. So there is an adverse selection process that occurs when you try to build an advisory board through free equity allocations.

Scenario 3 (Makes Sense): You are missing a key piece of DNA in your company necessary to execute on your plan (i.e. non-technical founder engages outsourced development shop and does not have the domain expertise to effectively manage the project).

Savvy founder’s response: This is actually a scenario where I would advocate parting with some equity to get a “technical advisor” to help manage the project.  But this is not really an advisor at all.  The person you bring on will be performing a day to day role within your company.  In reality, they look more like an independent contractor who is willing to accept equity (as opposed to cash) as payment.

My argument is not that an early stage founder should be stingy with his/her early equity…in fact quite the opposite.  At the onset of a venture, the financial outcome of your company is pretty much binary: either you build something and successfully exit (make a lot of money), or you fail…a couple of points allocated toward increasing the likelihood of a positive outcome are well spent…just make sure they are being spent on actual work and output, as opposed to advice and guidance.

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10 Responses to “Founders Beware: True “Advisors” Don’t Ask for Free Equity”

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At first read I agree with you — good entrepreneurs all had their own mentors and if they dig you and your project, will try to return the favor by mentoring you. However, as I think back to my first startup years ago, I remember that I did give small equity portions to some wonderful mentors. It can be a nice gesture that is meant more as a thank you than a direct incentive for time given. I didn’t regret it. In all but one case, the amounts of stock were tiny. I’d also note that not every useful mentor (with skills or knowledge that fills a gap) can afford to invest in such a high risk thing as a startup, but they might be in the position to invest some time.

Still, you are right to warn about a predatory “grab” from a third party.

[…] It’s important the members of your Advisory Board have some background in your startup’s field, and it’s good to pick people who have succeeded as entrepreneurs. The members of your Advisory Board should also be able to speak with experience to the challenges and the successes of being executives. In other words, your Advisory Board is not made up of your attorney and your accountant. The latter, you pay for their professional advice. And while you can offer members of your Advisory Board some […]

[…] you pay for their professional advice. And while you can offer members of your Advisory Board some <a href="compensation, their primary role is to offer mentorship, not to take on a […]

[…] you pay for their professional advice. And while you can offer members of your Advisory Board some #avatar_footer { display: none; } /* Change this in Users > Avatars. */ Avatars by Sterling […]

[…] It's important the members of your Advisory Board have some background in your startup's field, and it's good to pick people who have succeeded as entrepreneurs. The members of your Advisory Board should also be able to speak with experience to the challenges and the successes of being executives. In other words, your Advisory Board is not made up of your attorney and your accountant. The latter, you pay for their professional advice. And while you can offer members of your Advisory Board some […]

[…] It's important the members of your Advisory Board have some background in your startup's field, and it's good to pick people who have succeeded as entrepreneurs. The members of your Advisory Board should also be able to speak with experience to the challenges and the successes of being executives. In other words, your Advisory Board is not made up of your attorney and your accountant. The latter, you pay for their professional advice. And while you can offer members of your Advisory Board some […]

[…] you pay for their professional advice. And while you can offer members of your Advisory Board some <a href="compensation, their primary role is to offer mentorship, not to take on a […]

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i’m so happy that i saw this site. that comment was so nice. thanks again i signed up to this blog.
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I don’t agree. I’m not a scumbag if I ask for equity to serve as an advisor, and offer it to people I ask to be on my board of advisors–typically .25% each.

Here’s why:

1) I don’t invest in startups that aren’t my own. I’ve done that, and done it poorly. That has no reflection on my value as an advisor, or a reflection on my accomplishments to date. I just suck as a startup investor.

2) My time is valuable and limited.

3) There is little likelihood that equity will be worth anything, yet my time and advice are in fact valuable.

4) I am asked by dozens of entrepreneurs for help and advice. I’ve helped at least 4 dozen over the past 10 years. To date I haven’t taken equity in any of their startups. Big mistake; one of them exited for over $20 million on little invested, and I had put in a bunch of time up front that made a difference. More have done very well for themselves; I haven’t tracked them all.

I appreciate the sentiment, and I know of a lot of “advisors” who really add little or no value and have no business advising startups, but you’ve really used a very broad brush here, a bit unfairly.


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    I’m a NYC based investor and entrepreneur. I think there is one metric that can be used to measure the value of a human life and that’s impact. How did you change things? How many people did you touch? How different is the world because you lived in it and how positive was the change that you affected? (p.s. i don’t use spell check…deal with it) You can email me at Jordan.Cooper@gmail.com

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