I’ve heard several disappointing stories recently from first-time entrepreneurs who are out building their mentor and investor networks.
The companies’ specific situations differ, but the basic story goes like this:
— A credible-seeming business person reaches out to the company offering “help” with their business or fundraising.
— This person represents themselves as an active angel investor with check-writing capacity, but is uncomfortably vague when describing their own recent investing activity.
— Before any material “help” has been delivered, the “helper” hints (or flat-out demands) that they be compensated for their valuable services with equity in the entrepreneur’s company.
The requests can be astounding to anyone familiar with early-stage financings — more than once I’ve seen self-declared angel investors asking for double-digit percentages of founders stock for their invaluable “advice and assistance” — with no investment forthcoming.
In the best case, the entrepreneur smells a rat and quickly turns off the relationship. But all too often these deals get struck and the cap table gets loaded up with “advisors” who promise a lot (often including an angel investment) but wind up creating no value and piggybacking on the hard work of the team for the life of the company.
My views on this are probably too strict, but I’d rather not see anyone in an early-stage cap table that isn’t (a) a founder or full-time employee of the business, or (b) someone who wrote an actual check (not an “in-kind” contribution of services) when the company really needed the cash. The only exceptions that make sense to me are grants for carefully vetted and truly strategic advisors or board members, and even these should be small (e.g., a fraction of a point for advisors up to a full point for board members) and subject to annual vesting and renewal.
Good mentors are critical to entrepreneurial success, and programs like TechStars earn their reputations by connecting top-tier teams with amazing mentors who serve on an entirely volunteer basis. Every mentor has their own reasons for doing what they do — some love to teach, some want to give back, some love new ideas and many want to have a chance to invest directly in the teams and ideas they connect with. But…
…no high quality mentor does what they do with the expectation that they’re going to receive material compensation for their help.
In my experience, good mentor relationships never start with a request for comp, and any time you find yourself in a conversation with a “mentor” or “angel” who spends too much time focused on how they’re going to get paid for their “help”, my advice is to turn and run.