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I'm a sole founder of a rather ambitious company which I have worked tirelessly to build. The company will require some heavy lifting from well connected political persons to help the company to expand in the future. I have indeed found a extremely well connected individual that will help open doors and make introductions, however the individual has asked for a 10% equity stake in the company in exchange for a "super advisory role".

The individual in question was a top ranking government official and was introduced to me by a valued friend. He has impeccable contacts throughout all layers of government, was previously the CEO of a multibillion dollar energy company and sits on a range of domain related boards.

The individual has promised to lobby hard on behalf of the company and play a mentoring/advisory role. He has already been quite gracious with his time to date, while facilitating some valuable introductions and meetings as a gesture of goodwill for which I am immensely grateful.

My greatest issue is that the risk for the individual is minimal if the company fails, however, the upside is potentially significant. The dilemma is keeping this individual incentivized to grow the company and to continue to add a significant value over time, while protecting my position if things don't work out.

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Well if this person is as good as you say, then it may be worthwhile as a make or break for your company. I would offer them a 2 stage deal, something like:

Buy In Over Time. 10% "buy in" say 1% per 2 months they are actively advising for up to 1.5 years.

Additional Equity Milestone. If they hit specific targets you establish then they get an additional 3% per target.

You could either specify all the milestones upfront if you know them (this is safer) OR say there will be 3 or 5 milestones we can target in the next 5 years, he gets his additional equity when they arise.

I think this is a suitable balanace between you as your not just giving it all away in one go and he can get more of an ownership if he helps in the way he says he will.

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The alternative is to offer 1% per milestone up to 5% and ask him to buy the other 5%. Then he does have some skin in the game and the risk of failure is higher. – Chris Kluis Oct 10 '11 at 13:35
@ChrisKluis thats a nice approach as well, I agree with the getting his skin in the game. – Robin Vessey Oct 10 '11 at 23:14
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It may seem like you need this advisor and he may be able to introduce you to influential people in your industry; however, I think as time passes and your business grows you'll come to view 10% of the equity as a very steep price.

As your business grows, two things will likely happen. First, you'll need this advisor and his contact's less because your company and its products will naturally become the reason these contacts will want to meet you and not because of your advisor and his relationship. No relationship is going to overcome poor product-fit with the customer.

Second, he's likely to run out of contacts faster than either he or you thinks he will. No one's network is as big as it seems and sales is a numbers game.

Some level of equity may be fair. 10% sounds way too much to me.

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+1 I agree with you 100%... our views are quite similar – Siva Oct 10 '11 at 16:11
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Bastian, My quick gut answer would be NO.

However, if you do give anything more than a max of 1-2% (for very very early stage) then please make sure you do so in increments against specific deliverables or milestones.

[In my startup experience - I found that most folks who asked for such big chunks for an "advisory" role did not understand what that role was about and what it took to run and grow a startup. I even shared with them some internet links showing what advisors do and how much share they get]

A couple of points of caution:

  1. Introductions are more useful at the very beginning of your startup (6 months?). After this you will have so many contacts (some made by this individual) who will offer to introduce you to others for free and your own network will grow (you should actively do this). So the value of this individual will not be as high as it is at the very beginning
  2. Introductions are just an opening of the door (1% work). You still need to work at staying inside and closing the deal (99% of the work). Most introductions will be worthless. So make sure this person is on the hook for making many many introductions if that is what they are doing.

In summary ask yourself i.e. do you have something measurable that came out of his contributions? Can that be sustained and will you outgrow much of it? (I did)

-Siva

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One thing I'd like to add - do think, if not 10%, then what is that X% you are willing to offer? Your act of selling has already begun, and you are already at the negotiating table, so treat this "demand for 10%" as yet another opportunity to hone your negotiation skills... without that, a company will anyway not be closing any deals or not profitably. Something that I'd look at is, how fungible this person is, considering your particular situation. Also let the vesting be quarterly, over 2 years. – icarus74 Oct 10 '11 at 17:07
Thanks for the opinions. Icarcus, I would be hard pressed to find another person as well connected as this individual, my corporate network isn't extensive. – Bastian Suz Oct 11 '11 at 6:30

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