What’s an advisor to a startup deal? Technically, advisor is one of those bucket terms that means anything and everything, depending on context. Those names and faces and backgrounds that turn up in pitches and business plans might be deep and important relationships, somebody with options or equity who is going to be helping for the long term; or meaningless fluff, somebody who agreed once to have his or her name appear, but really does nothing.
When advisors come up in a pitch, I immediately ask how advisors are compensated and what they really do.
And here’s how I feel about the answers I get:
- Free advisors are likely to be as valuable as free advice. Yes there are exceptions to that rule, like family and long-time business relationships, but most of the time no compensation means no thought, no effort, no real contribution. Everybody’s busy. I see way too many deals bragging about advisors who are just lending their name to the business plan, as a favor to a former student or friend of a friend. I don’t believe they’re going to make calls, dig into details to offer real advice, or get dirty. And it hurts the credibility of founders when they show off names that don’t really mean anything.
- Advisors with small equity shares are good, and advisors with options are as good or even better. These are people who probably will return calls, and make calls, and pitch in to help.
- Advisors with options or equity should be long-term people who will stay with the company from startup to exit. Equity is forever. Options can become equity. Nobody should ever be on the capital table for what they did once in the past. Everybody’s busy, but options motivate people to help.
- I dislike professionals as advisors. Attorneys and accountants, for example, are better as professional friends than as advisors with equity or options. Their business model values fees, not equity. So the advisee companies get the last quarter hour of the last day. And having a vendor own shares means fewer shares for the investors and management team. When a web designer is the advisor I wonder what that means down the road as the startup grows. Free web design forever? Why is the web designer not a regular team member. Why are they holding back?
- Advisors can have too much equity. There’s no exact rule but when an advisor who isn’t really working with the company regularly ought not to have even a whole percentage point of equity.
Advice is easy to get. Help, contributions, real discussions, digging into the details, making calls, returning calls, opening doors, and getting things done, that can be really valuable.
And on both sides, investor and startup, we need to figure out what advisor really means.