Friday, February 24, 2006

Advisor Capitalists?... 1% or More? Hells No!

So I came across Tom Evslin's post in response to Stowe Boyd's "Advisory Capital: A New Basis For Strategic Involvement" post.

Being cynical at times... well, a lot of the time, I see Stowe's post as part of his pitch to drum up business in advising startups and position himself in a better light. After reading his post, I really don't see much of a difference between an "advisor capitalists" and a regular advisor.

If I was building an advisory board, why would I give someone like Stowe 1% or more and others the typical .2%-.5% worth of equity (initial equity structure)? This can create a disincentive for the other advisors to put in their sweat since there would be such a large gap between an "advisor capitalist" and themselves in terms of equity but probably not in terms of time and effort. I'm speaking from my own experiences with advisors. As I posted before, some advisors you get to sit and be pretty on your board while others you have to play an active role in building your startup.

Even in my current role as an advisor to a mobile social networking play, I received the typical amount of equity (.2%-.5%). I communicate at least once a week with this startup, active in introductions, and active in their strategic development. Should I ask for more equity? No. From my own experience with advisory boards, I don't think such activity warrants more equity. Stowe goes as far to state:

I believe we will see this boosted 5X, 10X, or more, to attract and retain powerful ACs.

Again I see this as positioning, and I also see this as crazy. Why would I give any advisor 2.5%-5%+ of my initial equity? Maybe if a contract was created where this advisor devotes 20+ hours per week. Even then would I sign up someone like Stowe who doesn't have significant capital raising experience? Who cannot advise me on deal structure and provide their personal insights into the capital raising process? Hells no!

Fred Wilson discusses the importance of cash at risk in the relationship between entrepreneurs and VCs or angels that Stowe misses, but more important is the fact that most of these early-stage companies will need a significant amount of cash to succeed. Forget the and Measure Map acquisitions by Yahoo! and Google out there, the vast majority of startups need more than $20,000 or a few hundred thousand to become sustainable companies. Since this is the reality for most companies, so the only situation where I would even consider giving an advisor more than .5% is if they had signficiant experience raising capital and building out companies. For strategy sessions with an "industry thought leader," I would rather read their blog or buy a book than give up 1% or more.

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