Today’s post of the day comes from Micah Baldwin. Micah isn’t a VC – he’s an entrepreneur, CEO, and experienced mentor (he’s been involved in TechStars since the beginning.) He has a great rant titled Advisors Stop Screwing Startups. He makes several very important points about how advisors are screwing startups, why they should stop, and why entrepreneurs should take responsibility for 100% of their equity and be a lot more careful with it.
As a long time advisor for many companies, I’m a huge believer in “give before you get.” If you are an amazing advisor, your reputation should precede you. Be free – help – and when you are providing real value, entrepreneurs should give you something in return. But entrepreneurs, if the advisor asks for something up front, be skeptical. Sometimes its legit, but often it’s not.
Question: We are looking early stage funding for our startup and came across some people claiming to be “VC Broker”. Is there such a concept in the investing world?
It’s highly unlikely that they are legit. I’ve never heard the specific term “VC broker” before and generally don’t think much of people who represent to early stage companies that they “can raise money from VCs for you for a fee.”
There is definitely a category of consultants that prey on early stage companies. These are people who offer to “do something for you for a fee.” You should approach all of these conversations with skepticism if the person wants to charge you money for this.
If they represent themselves as being a conduit to VC financing and you want to explore more, the first thing you should do is ask them for a comprehensive list of all of the people and contact information with whom they have done work for in the previous two years. You should then systematically contact each of these people and find out how things went. In most cases, the mere act of doing this will flush out all of the nonsense.
Interesting, there was a similar question asked in 2007 – see the post Are There Venture Capital Brokers? for a somewhat broader treatment of the topic. There is also a good post up on The Smart Startup site titled Beware of Venture Capital Brokers.
Finally, there is, not surprisingly, a site called VC Brokers. Ironically, the link to “Entrepreneurs” is blank and throws a 404 page not found error.
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.
Q: When working with a recruiter to hire for VP Engineering, etc. jobs, what are the standard terms I should expect in the recruiter’s contract? Should there be a time duration in which the new employee should stay with my company prior to the recruiter getting paid?
Todays answer is courtesy of Seth Levine, one of our partners.
A: (Seth) Maybe it’s collusion or maybe the industry has just done a nice job of towing the line, but overall I think you’ll find a great deal of consistency in the terms that most recruiters will offer you.
Standard recruiting fees run 30% of a placement’s first year salary. This should NOT include any variable pay, but may include either guaranteed bonuses or up-front payments (you will, of course, try to negotiate these out). You should expect to pay a retainer in the range of $30k (you may be able to break this up into multiple payments). You should absolutely expect to get a “guarantee” on the placement that will run between 90 and 180 days – you won’t get your money back, but the recruiter will find you a replacement candidate if their first candidate doesn’t work out (note: it’s important to find a recruiter who is really going to see your project through – they are essentially working for “free” if their first placement fails and your relationship with the recruiter and their level of integrity is what keeps them working hard to find you a match).
For more senior searches (CEO and possibly COO) and particularly when working with a higher profile search firm the fee is often higher (40% is common, sometimes rising as high as 50% for a high profile CEO search). For lower level searches (say for engineers) you might pay a bit less (and in some cases can negotiate a fixed fee per engineer rather than a % of salary – especially if you use the same recruiter for several positions).
Good recruiters should spend the time to understand your business, its culture and your specific position needs before really digging into their search. You should also expect (demand) that they perform a detailed screen on each candidate (i.e., your recruiter should only be presenting you with highly vetted candidates).
Q: My question is “What is a reasonable compensation package for a startup lawyer/firm”? I’m now starting a company in Seattle and have been talking with an attorney in Seattle. After 2-3 meetings, we got around to his compensation proposal and I was a bit shocked. I thought it would be a reasonable equity piece (0.5 – 1.0%) in exchange for deferred/reduced compensation.
The proposal was:
* A max monthly fee ($4k/month, if expenses warranted, with excess carried to future months)
* 2.4% Equity, vesting monthly
He told me that both were negotiable, and that the 2.4% was usually for people where he’d need to make all of the funding introductions, and where the founders were less experienced. But, still, it makes it hard to negotiate.
If there’s a standard/reasonable level, I’d love to know what it is, to save time on this point and get to the important matters (quickly raising angel round, and building product/shipping gauging customer interest)
Thank you for any/all help,
A: (Jason). This is shocking – I agree. I took the liberty of checking in with a Senior Managing Partner at a major Silicon Valley firm (which presumably has higher costs of operations, not lower) and her was his response:
First, $4k max a month is hardly much of a deferral. That is a pretty high legal run rate for a non-VC backed (presumably Web 2.0 or 3.0) early stage company.
My package is usually the following:
If you are looking for VC money to get it started, don’t incorporate or incur any legal costs (hence no deferral needed) until you get a term sheet. Then, standard rates, no deferral.
Assuming you are self-funding/angel-backed for a while and are really tight on cash, and I think you are worth the risk:
1. Fixed fee for incorporation, founder issuance, all initial stuff $5k.
2. Actual costs, usually not more than $3-4, for the angel bridge note financing.
3. Deferral of up to a set amount, perhaps $15-20k, until the earlier of a VC financing, sale or some future date, usually 9-12 months out.
4. In exchange for the deferral, we get 0.30-1.00% of the fully-diluted equity, at founder price.
5. If we need to continue to defer after the set date arrives, agree in advance that they will give more equity 6. Also get right to invest alongside the VCs.
VC introductions, thoughts on the business plan are included, obviously.”
– So it looks like your lawyer is above market. The person who sent me this note competes with all the other big named silicon valley firms and knows what the competition charges as well.
Question: Does a Board of Advisors provide much value to a startup company? Would having a Board of Advisors have any impact, negative or positive, on angel or venture capital funding?
It’s a lame answer, but “it depends.” We’ve seen the effectiveness of these boards skew all over the map. We’ve seen some that are quite helpful with strategic direction, sales, marketing and business development and we’ve seen others that are simply faces on a website. If you go through the trouble of creating one, make sure they are really champions for your company and will be there to answer your calls. Sometimes the more of a luminary the advisor is, the less likely that they’ll have time to really impact your business.
As for an advisory board’s affect on attracting investment, it’s not really a factor. Clearly it’s not a negative if you have a board of relevant advisors, especially ones that have prior successes in a similar sector. That being said, most venture capitalists will choose a company based on the management team and the company itself, not on who has decided to take an advisory role.
My personal opinion is that if you have some high quality people who are willing to put in the time and who knocking on your door, you might want to consider creating an advisory board. I wouldn’t go out and spend much time looking to form one, however.
Question: One of our founders (not the majority shareholder) has a wife who is partner at a law firm with great VC connections. We’re setting up as a C-corp, and the question is, would it be dangerous to let our partner’s wife’s firm handle our legal issues? On the one hand, they would definitely keep the company’s interests firmly in mind and do their best to make sure we’re successful. On the other hand, the paranoid part of me is worried of bias towards the husband to the point of detriment of us other founders.
Our Take: Listen to your paranoia. What seems like a situation, today, where everyone’s interests are aligned, may not be the case down the road. What if you and your co-founder disagree down the road? You as majority shareholder probably have the right to remove this person, but do you really want to speak to his wife in order to execute the termination?
Beside this one obvious potential conflict (and trust us, there are many others), it’s never a good idea for a lawyer, doctor or other professional to “treat” their family members. Company counsel is to represent the company, not the husband and it’s hard to be objective when it’s family.
Question: For an entrepreneur, when should a lawyer be introduced into the conversation when dealing with Angels and / or VCs?
Our Take: This depends a on whom your lawyer is and also who you are. From your question, my assumption would be that you aren’t perfectly comfortable with how your lawyer will “play” in front of your potential investors.
Investors are used to lawyers. We use them on all of our deals and our companies use them on all of their deals. In fact, some of us lawyers become investors! It’s no secret that we all have them and even if they aren’t present on the front line, we all assume that each other have a lawyer in the background.
As far as when to introduce your lawyer to potential investors, consider who your lawyer is. Is he or she an aggressive, take charge, “win at all costs” type? Is he or she a junior person relative to the potential investors you are speaking to? In these two cases, you might want to let the business deal take a bit of shape before you set your lawyer loose.
On the other hand, if you have a well-experience, non-confrontational, business advocate type of lawyer, it’s probably never too early to introduce them if they can help move along the business process. In fact, we often see many of the same partners from the bigger firms on the other sides of deals and are happy to interface with them from the onset.
Whatever you do, make sure that if you need your lawyer, get your lawyer involved. If you are starting to discuss terms and are getting in over your head, get your attorney involved ASAP. It’s none too fun a situation if you negotiate a deal with a potential investor and then have to recant after your lawyer becomes involved.
Along with a similar post, this situation underscores hiring an attorney who is a trusted partner, not simply an hourly paid service advisor. If you feel comfortable with your counsel, most likely your investors will too. I can’t recall any deals that have died because of a particular company’s counsel’s behavior, but we certainly have many war stories to tell of lawyers whose behavior has made the process much less fun.
Question: How do you find a good law firm? Which one’s can help me get in touch with VCs?
Our Take: There are many good law firms out there doing start up work. What used to be seen as solely a costal practice, has now permeated through out the country. Most major cities have at least one law firm that has the requisite experience to help you. The best referrals are from friends who have used particular attorneys. Most folks are quite open about their opinions. The key questions to ask are: “how many companies have you worked with that are now venture backed and weren’t so when you began working with them? How many venture capital (versus hedge or private equity) deals have you done in the last year? Does your firm have a dedicated startup practice, or is this just a “side business?” I’d also tell you that doing venture capital law isn’t rocket science, so if you get someone being too boastful, or putting down his / her competitors, they clearly are bragging more than it is warranted. The most important part of being a venture capital lawyer is being a good listener with sound judgment and having a good relationship with the entrepreneurs, along with the requisite experience. Make sure with whomever you choose, that you see them as a true partner, not an hourly paid servant.
As for which law firms can help you connect to VCs, again, there is good news. Ten years ago, or so, it was seemingly rare for law firms to have a close enough connection to get your business plan in front of a VC. Maybe they could send over the business plan, but the regular experience was that they usually entered a “black hole.” These days, I think VCs are more open to really looking at business plans submitted by their law firm partners. One thing that is certain: law firms that do VC fund formation work definitely have good contacts to VCs. So if you are looking for your lawyers to make some intros, you can never go wrong with a law firm that helps form the VC funds themselves.
We get a lot of questions that have “simple answers” and “more complex answers.” It’s kind of like life – and the simple answers usually trump the more complex ones. For example, I received the following question the other day by email.
I’ve been working on a startup concept for many months now. I have NO experience with anything like this but the concept seems to have alot of potential and is beginning to gain some traction. I sought out a business “coach” to help me present the project effectively. She is very excited about the concept and claims she will put everything together. Financial projections, web site, investors, etc., etc. Because I can’t afford to pay hourly for her services she will work for 1-2% of gross profit. Sounds expensive but I have no idea what these deals typically look like. Does this sound fair? Could a commitment to this adversely affect later funding rounds? Any thoughts or references would be greatly appreciated.
I wrote back with the following “more complex, but not complete” answer.
That’s extremely expensive. Gross profit isn’t really the right thing for her to be working for. She should be asking for “equity.” 1% – 2% of the company for putting together financial projections, web site, and investors is certainly reasonable (especially if it includes investors), but I’m not really sure what that means – people often promise a lot and then deliver very little. You should – at the minimum – talk to other people she has worked with before to do this and ask how it worked for them.
After I pondered the response, it occurred to me that there was a simpler answer.
Boy – that sounds sketchy to me. Before you spend any more time with this person, I’d check her references. Ask her for five other people that she’s done this for – especially the “put together the investors” part – before you agree to anything. In addition, (longer answer about equity vs. gross profit follows…)
If you’ve just met with someone and they offer you something that sounds too good to be true, as the cliche goes, it probably is.