Occasionally, I get asked to serve as an advisor to a startup founder. In the past I genuinely enjoyed the role and tried very hard to help wherever I could. Official advisors usually get compensated in the form of options (or equity), typically between 0.25%-1%. So there’s always the possibility that your effort, as an advisor, is rewarded financially when the startup successfully exits. It’s a fun way to be along for the ride.
When I started angel investing, being an advisor got complicated. I started to think of the scenarios where I would choose to be an advisor (if asked) versus investing. Are there any cases where that makes sense?
I already advise the founders that I invest in (to the extent that they’re interested in my advice), and if I say “no” to investing, how can I possibly stay on or agree to participate as an advisor?
It’s a tricky and somewhat frustrating situation. I want to help as many entrepreneurs as I can, but it seems silly to agree to participate as an advisor but not invest. What kind of signal is that to the founders? What kind of signal is that to other investors? “I don’t believe enough in your startup to invest, but I’ll happily advise you, and you should provide me equity as compensation.” It just doesn’t make sense to me.
So I haven’t taken on an official advisory role since I started investing. I haven’t been able to rectify in my mind how to balance the two. I am still actively advising a number of entrepreneurs that I haven’t invested in, but I don’t do so in an official capacity, and I don’t take compensation.
And here’s another strange thing about advising vs. investing. When you invest relatively small amounts as I do, you’ll often see advisors that haven’t invested with a higher stake than you. This has happened a few times when I’ve looked at cap tables. I’ll see well known / famous people with 1% equity that haven’t put a single dollar into the company. Then I look at what my investment will get me and it’s lower. So I am committing both money and time, but “earning” less than some advisors. Granted, those advisors were participating earlier than me with the founders — and advisors can be a huge help — but it’s an interesting thing to see. Advisors also can’t pro rata maintain their share, which means they get diluted over time, even if they continue to help the companies; as an investor I can maintain my stake in a company (although it costs more money). I don’t have a “solution” per se to this, it’s more an observation that strikes me as interesting, and makes, at least for me, the decision to advise vs. invest even more challenging.
Advisors that genuinely and consistently help and roll up their sleeves can make a big difference. I’ve seen it many times, and believe in the power and value of awesome mentors. Founders have to be careful about the promises and platitudes that come from advisors though. You might think you’re getting big time value and then discover you’re not. Bottom line: choose wisely.
The same holds true for your investors. Choose wisely.
For me, I’m going to think a lot more about whether or not I can be an advisor (officially for equity) without being an investor. But I’m not sure there’s a way to do it easily that makes sense.
Photo courtesy of jvchuy.