We get a lot of questions that have “simple answers” and “more complex answers.” It’s kind of like life – and the simple answers usually trump the more complex ones. For example, I received the following question the other day by email.
I've been working on a startup concept for many months now. I have NO experience with anything like this but the concept seems to have alot of potential and is beginning to gain some traction. I sought out a business "coach" to help me present the project effectively. She is very excited about the concept and claims she will put everything together. Financial projections, web site, investors, etc., etc. Because I can't afford to pay hourly for her services she will work for 1-2% of gross profit. Sounds expensive but I have no idea what these deals typically look like. Does this sound fair? Could a commitment to this adversely affect later funding rounds? Any thoughts or references would be greatly appreciated.
I wrote back with the following “more complex, but not complete” answer.
That's extremely expensive. Gross profit isn't really the right thing for her to be working for. She should be asking for "equity." 1% - 2% of the company for putting together financial projections, web site, and investors is certainly reasonable (especially if it includes investors), but I'm not really sure what that means - people often promise a lot and then deliver very little. You should - at the minimum - talk to other people she has worked with before to do this and ask how it worked for them.
After I pondered the response, it occurred to me that there was a simpler answer.
Boy – that sounds sketchy to me. Before you spend any more time with this person, I’d check her references. Ask her for five other people that she’s done this for - especially the “put together the investors” part – before you agree to anything. In addition, (longer answer about equity vs. gross profit follows…)
If you’ve just met with someone and they offer you something that sounds too good to be true, as the cliche goes, it probably is.
Posted in: Advisors | Posted by: Brad FeldCOMMENTS (5)
I often work with university faculty at BU to start companies and I can't tell you how many of these people there are floating around. They usually just end up adding lots of hair to the deal through huge non-vested equity chunks or weird deals like the one described above. This will probably make the deal harder to fund
Seriously how important/difficult is creating web site?
Speaking as a VC, the mere presence of these "coaches" raises a red flag. We're generally interested in backing entrepreneurs who don't need that kind of help -- or who are resourceful enough to find it themselves by finding and selling a co-founder with the requisite skills.
The ? sounds quite feasible 2 me. Startup entrepeneurs (E.) have 'some' expertise and often its not in finance, investment, company structure, how a startup gets going, traction etc..
So these type of ?'s are quite common. There are only so many "hats" an E. can wear. The more 'rounded' E. has quite a good grasp on most of the issues that are necessary along the way and some have even read a few books, blogs, univ course or even read Brads 'words of wisdom' and of his 'buddies'.
Thats not counting those that have been there b4 hence their personal 'valuation' accordingly goes up by VC's/angels.
So a 'coach' is not necessarily a bad idea BUT as 'MC' indicates caveat emptor. Its a shame that they have to educate themselfs and some learn the HARD way :)
Lal
I think that there are subtle differences among the various "business coaches", "deal brokers", "finders" and the catch-all category "consultant" that float around entrepreneurs, but they all mean the same thing - they claim to help you fund and operate your company. The fact that was mentioned in the comments before - if you need one of these people, you're probably not ready for a professional investment into your idea in the first place. I think that what you should be looking for is a "co-founder" and someone who can fill in an executive-level gap in management after outside funding. They have to be paid properly, both in salary and equity but if they are the right person to get your company off the ground, then they are well worth it. This particular woman doesn’t seem sophisticated enough to perform this role, based solely on what she asked for in compensation. I ran into this on a deal where someone introduced me to an entrepreneur, but wanted a percentage of gross sales over a year for the introduction - no other added value. I quickly walked away from it, and have been wary of the guy ever since.
Probably should include vesting on successful completion of projects or milestones with the heaviest weighting on funding.