Angel Investors on Burn Rate and Great Now or Great Later

Tim Berry , Founder , Palo Alto Software

24 Jan 2012

Here’s an interesting question. It came up Tuesday night in an angel investment meeting:

My question is which looks better to investors: A higher burn rate with three great people on the business plan, or a lower burn rate with only two great people on the business plan? Two of the three want salary, not equity, and one of those two has a skill set that we need later, in growth phases, and not so much right now, in development phase. Also important to mention; we have three amazing advisors on the plan to beef it up as well.

My answer:

• Just a word of caution: “great” and “amazing” are overused words. Are they really?
• Most angel investors would much rather have a higher burn rate with three “great people” with different core skill sets than a lower burn rate with two “great people.” That would be a no-brainer.
• Most angel investors think of the burn rate as a temporary reality that growth and investment will solve. If your business isn’t likely to grow fast, then they aren’t that interested anyhow.
• Most investors want the founders to be well paid, but not more than market value, maybe even a tad less because they’re building a company and looking to win later on by having some equity ownership.
• It’s believable that some great people can be in a financial situation requiring a market-rate salary, but it’s also disappointing to see someone in the early stages that doesn’t want any ownership at all.
• It’s not so good to see a plan depending on somebody who wants to make a high salary from a startup, relatively high compared to market value, and no equity.
• People who want all money and no ownership are not as credible as co-founders because they are way more likely to leave when things get tough, or, simply, when they get a better salary offer.
• If one of the three great people isn’t extremely useful until a year or two from now, then rethink; maybe he or she is not so great. Great people are useful now, not later.
• Another option: keep that useful-later great person in the mix contributing part-time for options, with a promise that he or she go full time and on salary later, as soon as funding or revenue allow it.
• Most investors are skeptical about advisors, amazing or not, unless they are tied into the company with stock options or some other skin in the game.

All opinions expressed are those of the author,  and do not necessarily represent those of Gust.

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