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Entrepreneur Office Hours - Issue #170
Who feels like trading equity for advice?
In this issue’s Q&A, someone asked a question I’ve gotten often during my career. It’s a question about compensating advisors with equity. I won’t spoil the answer here since my full response to the question is below. However, it got me thinking… I give tons of advice. Where’s all my equity?
Think about it… this is my 170th issue of EOH. Each issue has ~2 articles. That means I’ve put out roughly 350 articles. And each article has an average of 1,000 words. That’s 350,000+ words of startup advice. Surely, if other people can get equity in exchange for their advice, I deserve a few percentage points somewhere… right?
No? Oh well… it was worth a try.
In any case, since I won’t be getting stock options from any of you anytime soon, I guess I’ll just keep giving away advice for free. That continues with the two articles below.
Entrepreneurs are constantly making the same mistake, but you can’t easily recognize it unless you’re in the right position.
Fundraising isn’t nearly as important to building a startup and its ultimate success as most founders think.
Office Hours Q&A
I recently discovered your newsletter and am really enjoying it.
If you have time, I’m wondering if you’d be willing to answer a quick question for me. It’s about advisor equity.
I have a few people who have offered to be official advisors to my startup in exchange for equity. I think that’s normal, right? Do other startups do that, do you think it’s a good idea, and, if so, how much equity is the right amount to give an advisor?
Ah… yes… advisor equity. Back when I was building startups, I remember lots of people were willing to give me advice, and the smartest of them would ask to do so in exchange for equity.
For the record, by “smartest of them” I don’t mean the people with the best/smartest advice wanted equity. I just mean some people giving advice were smart to ask for equity since… well… why not? Who doesn’t want a bunch of free lottery tickets in exchange for their thoughts and opinions?
Though, to be fair, I feel like any company willing to give away equity to someone just for advice probably isn’t too good of an investment, meaning the equity ultimately won’t be worth anything.
By this point, based on my above comments, you can probably guess where I stand on the topic of “advisor equity,” but I’ll go ahead and spell it out anyway.
DON’T DO IT!
No decent mentor will ask for equity just for giving your startup advice. In part, that’s because doing so is shady. After all, advice, by itself, is worthless. Everyone has advice, and, to be honest, most of it stinks (mine included). At the very least, it’s not worth equity in your startup. If your advisors are good, they’ll know that. And, if they’re good people, they won’t try to manipulate you into giving away equity in exchange for something that’s most likely worthless.
The other reason trading equity for advice is bad is because the optics look terrible for fundraising. Simply put, if you tell potential investors you’ve got a bunch of advisors on your cap table, they’re going to ask why those advisors aren’t also investors, and you won’t have a good answer. Instead, you’re going to look like a bad investment. After all,those advisors are supposed to have “insider” information into your company, and they’re also supposed to be experts in your market. If they’re not also investing, it’s going to be a red flag to other investors that people who know what’s really going on inside your company don’t want to risk their own money.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!