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My co-founders and I just began searching for $1.5-2M of funding. We met with someone who has many contacts and friends who are angels or VCs.

After meeting with us, he surprised us by offering to:

  • Be an independent director of our startup. He'd advise on the shareholders' agreement, business relationships, and business model design and strategy. In return, he's asking for $1500/mo plus $1500 for each Board meeting. This would be payable if we raise money or reach a certain amount of revenue.

  • Be a consultant for raising funds. He'd advise us on our approach and pitch, and provide introductions via his commercial and personal network. In return, he's asking for 3% of the raised funds.

My co-founders and I are new to raising funds, and thus don't know how to evaluate this offer.

Assuming that he's experienced with startups and raising capital, and has an extensive network of personal and commerical contacts, is this offer fair?

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3 Answers

up vote 6 down vote

This arrangement is backwards. This is not the way legitimate capital raising works, at least in my circles. This sounds like someone trying to take advantage of you. I would stay away from this guy.

If this guy really believed in your company, let him invest in it.

If he does have "insider VC connections" that he can somehow "introduce you to," the very first question those VCs are going to ask him is: "Did you invest?" And he'll have to say no. And the most important thing to an investor is social proof: who else invested? This guy's value as an introduction plummets if he isn't also investing.

Once again: this is not the way legit startup fundraising works. This is the way slightly shady players take advantage of all the dumb startups that want to raise money.

If your startup is fundable, you'll find plenty of investors and they'll be fighting for a piece of the pie. The investors you encounter--at least, the legit ones--will all be begging for the right to invest in your startup, not demanding $1500 a month.

If your startup is not fundable, you won't find many investors anyway, and the investors you find won't be very well connected and will not position you to grow and raise more money.

Once again, and this is the most important principle: A legit player who believes in your business should be fighting for the right to invest in your business, not selling his services in exchange for a slice of the proceeds.

(edited) The problem is that this guy is not going to have any skin in the game. He is not doing anything for you and not taking any risk. He either wins a 3% stake in your company, or he loses--nothing. There's no reason for him not to do this same deal 100 times in hopes of "winning" a few of them... it's all upside.

This is exactly equivalent to the guy that says he has an insider connection in the Harvard admissions office, and he GUARANTEES to get your child into Harvard for $10,000. If he fails... you get your money back, 100% guaranteed. And 100 parents sign up, and he does nothing, and 20% of their kids get into Harvard, and he keeps $200,000 and returns the rest. And all those parents are thinking, "What's the risk?" And indeed, the risk is that your child DOES get into Harvard.

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Am I missing something @Joel Spolsky -- didn't the question asker say that the $1,500/month is payable IF they raise the funds or achieve a certain level of money? All he is asking for now is an agreement that IF he raises the funds (at 3%) THEN he will be put on board to be involved in the company moving forward. Please explain how that is "taking advantage" of the company? – Joseph Barisonzi Jul 6 '11 at 2:58
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To be fair I don't want to go so far as to say that this guy is scamming them. Just that the terms he's asking for are inappropriate--a little bit, eh, you know, more than a hint of smell about the thing. When you take a meeting with someone in hopes that the money will be flowing from him to you, and then he proposes the opposite arrangement, something is amiss. – Joel Spolsky♦ Jul 6 '11 at 3:13
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Yeah. And I'll add ONE MORE thought. If this person really has clout with VCs, $1500 is chickens**t. The people who have clout with VCs are other VCs and past entrepreneurs who have been successful. Real players couldn't care less about $1500, their toothbrush costs more than that. The fact that he's fighting over dimes makes me question how legit he really is. – Joel Spolsky♦ Jul 6 '11 at 3:49
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@Joel Where does it say that he is not vying for equity? Where does it say that he is fighting over dimes? Where does it say that at all? Where does it say that he turned down a request for an equity investment? Where does it say that he was pitched for money? It doesn't. All of those have been assumed. And while they might be good assumptions-- they are not consistent with the facts as presented in the question. – Joseph Barisonzi Jul 6 '11 at 5:30
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@Joel -- There is a profession of fundraising-- raising funds for other companies, supporting companies capital acquisition campaigns. As professionals they deserve to paid. Some have skin in the game, other's don't. Do you ask your accountant to make a capital investment in order to be your accountant -- or do you pay for and receive their professional counsel? Do you ask your lawyer to make a capital investment in order to be your lawyer -- or do your expect to pay for and receive their professional counsel? – Joseph Barisonzi Jul 6 '11 at 5:38
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up vote 3 down vote

Congratulations on the exciting development for your start-up. Feeling confident to launch the capital acquisition campaign is a great place to be. You now have received your first unsolicited offer by someone who would like the money you have.

Based on my experience the amount of $1500/month plus board meetings deffered pending raising the money is fair. And based on my experience a 3% for raising the funds is fair.

There are lots of additional variables which should be considered as part of assessing this offer:

  • Your assumption that he is experiences and has the network is important. And will be important to verify.
  • His total portfolio right now is important to understand. where will you be in his priorities?
  • What are your out-of-poclet obligations prior to securing funding? Clearly lay out who is responsable for what hard costs -- like travel, meals, fedex. . .
  • What changes if any to your marketing materials and presentation will he want to have done? will he be making his own pitch deck -- or will you? what involvement and control will you have over that? Who will pick up the hard costs like image rights, and design work as needed?
  • Does you business model support paying people to be on the board? And if so -- would he meet the criteria of someone you had planned to add? If not, will it now?

It sounds like you excited someone based on your presentation, and with some careful walking through the next steps you may have found yourself a great ally!

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up vote 1 down vote

To start with, I would be fairly wary, I have been caught by guys who will "help you get there" ... They can extract a lot of money along the way and get 3% of your new investors money ...

On the flip side, as @Joseph says, it could be a great ally and the price tag looking back in 2-3 years may be cheap.

So it comes down to "how do you qualify them".

  • Talk to current and previous companies that he has worked with. Good or Bad if there is a track record its worth listening. If you you get a lot of "going to" but don't actually get to talk to anyone in 3 months then he is most likely stringing you along.
  • Make him earn his money. Don't assign it all upfront, "you get it if ... your introductions pan out" OR "you make a minimum of 3 introductions per 2 months (or something realistic)". "You do the leg work to put together submissions and work with us in the process".
  • The initial retainer isn't the only thing, as you go along and ask for help he may find other ways to charge you for effort put in ... quaify if this is to be the case or of the $1500 per month is an all inclusive price for effort. IF its $1,500 purely for existing and then he charges for effort ... you need to know this before hand.

If they are serious and actually have the right contacts none of the above should be a problem.

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