Ask HN: Should equity be traded for advice and connections?

[wf]

My own instinctual answer to this is instantly no, but my co-founders feel differently.

The deal is with two well connected business types who have been helping us for free for a few months ( and their advice and connections have been great so far) but (going without saying) essentially they don't want to help for free anymore. (This makes sense).

We plan to start beta testing our product in the next month or so and they've made a proposal to us where we give them a set amount of equity tiered over the next year (every few months they get a bit more) and in return they offer the following:

-Refine business model and develop a financing strategy -Position company for seed round financing, including critiquing and editing the Company’s investor package, to include an executive summary (and business plan, where required), financial projections, and company presentation -Help Company identify and apply for alternative capital sources, such as SBIR grants, business accelerators, and loan funds -Connect Company with prospective beta customers -Help identify and evaluate senior management prospects -Assist in creating an advisory board -When reasonably available, attend investor, strategic partner, beta customer, and other such strategic meetings -General advisory services, including sitting on an advisory board

We're all engineers and collectively don't have a lot of business experience. These guys do have a lot to offer: Both have excellent histories and their backgrounds checkout. One is part of a VC firm and has significant experience getting SBIR grants. The other was an investment banker turned entrepreneur and now full time strategist. Both have successfully launched and sold startups and have a lot of experience working for other startups. They have great credentials and I think they would be invaluable to any company as advisers and connections.

But for significant equity (5% each)? I'm not sure.

What is the HN take on this?

[brudgers]

It sounds like a bunch of crap to me.

The list of what they will do makes up for its lack of milestones with an over abundance of waffle words prefacing so-vague-as-to-be-meaningless actions - e.g.

  Connect Company with prospective beta customers
   

Forget, how many, forget when, that's not closing sales. Here's the base analysis:

If you don't need cash from investment right now, then none of what they are offering, even when viewed in the most favorable light possible, adds value to your company - you don't need positioning or critique or a grant.

On the other hand, if you need cash now, then you don't need and investment banker and VC who aren't writing you a check in exchange for equity - and granting them equity just makes raising capital more complex because now the vultures have legal standing within your corporate structure.

My gut tells me that their big idea is to get equity for no cash, sit back and hope that things take off more or less on their own. They're not even committed to attending meetings:

  When reasonably available, attend investor, strategic
  partner, beta customer, and other such strategic 
  meetings.

If they don't, they have lost very little. If they do, they have enough leverage to perhaps take control, or make their taking control the least painful alternative.

Good luck.

[ActVen]

No generic answer here is going to fully apply. You have had exposure to these people in the past. So, you should have a good idea of their value. If you think their involvement makes your company more valuable, then you should consider it. If you decide to move forward with it, put plenty of vesting/cliffs in their equity earning. Anyone confident in their contribution should be fine with that approach. Alternatively, you could find some financial investors to perform the same functions proposed by these people. The primary question to answer is: what is the real value people add to the company?

Update: Just wanted to mention that you don't need their help to get in an accelerator. The accelerator will also perform some of the very same functions they propose.

[scheff]

Perhaps look at having an Advisory Board. The kudos could be sufficient payment. Especially if you become a big success.

Alternatively, look at offering them stock options. If they believe in what you're doing, and want continued involvement, then it's worth asking them to have "skin in the game". Their advice will be more tailored to your success if you do.

Ask other businessmen what the cost of offering equity to outsiders is. It's usually more than the cost of giving away something intangible.

[ig1]

I personally wouldn't do it unless they were also willing to put money on the table. The amount of equity seems very high and makes me doubt how competent they actually are.

Also I'm not familiar with SBIR grants, but frankly I'd run a mile from an advisor who suggested that a software startup go the "government grant" route of financing.

[jarsj]

No. They want to be essentially your advisors and that probably deserves 0.5-1% equity in total. Anything more looks like a scam. You can agree to pay a finder's fee of couple of percentage if they contribute significantly in a fund raising round which is spending 50-100% of time spent by founders to raise money.

[orangethirty]

Put a price on their advice and connections. Don't hand out 5% just because. They could end up owning your company over the long term. Don't be so quick to hand out equity. Ever.

[lsiebert]

If I advise you yes, can I get equity for it?

I didn't think so.

Ask them to invest their money for equity.

[sharemywin]

I would make it contingent on success. Especially acquiring beta customers.

[wf]

Everyone- thanks for your advice. Definitely needed some outside perspective on this and you've been tremendous.

[pyoung]

Maybe offer one of them a full time position? From their description, seems like there is enough work.