Apr 29 2008 by Brad

I Cut The Wrong Deal With An Advisor – Should I Kill It?

Q: I am the co-founder of a startup that is currently in the process of trying to raise an early stage venture round. We recently brought on an advisor who has been incredibly successful in our space and has made introductions to dozens of potential partners and VC firms where he is an investor. He has all the right relationships, but we gave him low double-digit equity to get him on board (his demand). The equity vests over a period of time and I stay up at night thinking about (1) if we should kill the deal and (2) what a VC will think of the founders when he/she finds our how much we gave up to get this individual to help. To further complicate the situation, the advisor (who is very wealthy) has taken a pass on investing his own capital and this has been a sore spot for any VC looking at our deal. How do you think we should resolve this situation.

A: (Brad): My immediate reaction is "ugh."  You’ve been taken to the cleaners by your "advisor" – low double digit for introductions – even if they are the right ones – is radically overreaching.

A typical advisor like the one you describe will get around 1% of equity vesting over at least a year (usually two) in exchange for being an active advisor / board member.  As part of this, the advisor should be willing to invest something in whatever financing you raise (at least $25,000 – preferably more) to show some personal financial commitment to your endeavor. 

Since you have a vesting agreement in place, you at least have an option to kill the deal.  I suggest you start with a frank conversation with your advisor.  Explain that you really appreciate his involvement to date.  However, you’ve gotten two consistent pieces of feedback: (1) his ownership stake is much too high for his role and (2) you are getting resistance from the VCs he’s introduced you to because he’s not willing to at least put a trivial amount (for him) of cash into the deal.  Rather than create a conflict out of the gate, you should ask him for help addressing / solving the issue.  At the minimum you’ll force him to address the issue.

If he’s constructive and thoughtful, you might have a chance to modify the deal so it’s more reasonable.  If he reacts emotionally, you know what you are dealing with and have a choice to make.