Why advising very early startups is irrational… and what to do about it. 

Over the past decade I have had the honor to mentor and advise many, many dozens of startup companies and startup founders. Companies and founders are not the same thing. Besides the obvious differences, also consider that startups fail much more often than founders. Sources often disagree on the actualy percentage of startups that fail. You pick your own number — mine is somewhere north of 90% and south of 96%. Yeah, startups fail a lot. And when startups fail, their done. 

Not so for founders. Many founders (probably most of the “good” founders you know) pick up the pieces, consider the lessons and get to work on the next startup — sometimes quickly, sometimes after recuperating at a Big Co while they reflect on the lessons learned and replenish their mental and financial stores.

In the very earliest stages of a startup (pre-product, pre-revenue, pre-cofounder, pre-funding, pre-everything) advisers are not (or at least should not) spend their time based on some calculus of the quality of the startup business or the outcome it will achieve. The risk adjusted value of time spent with startups at this stage is approaching zero, i.e., the failure rate of these startups is closer to 100% than the average failure rate of ~93% — these are the startups that help raise the failure rate amidst all the other startups that succeed. 

This is a good time for a personal point of clarification. When I advise founders at this early stage, I’m not motivated by my financial upside. I’m not putting the 10,000 – 50,000 stock options I receive in a spreadsheet and calculating the IRR on my time spent. 

The amount of time you would have to spend advising companies at this stage to make it financially justifiable would surely suck you dry of every spare minute and make it virtually impossible to get your own stuff done. I’m also not looking to sell them anything. Nor I’m not looking for a job. 

If, as an advisor, your motivation is to sell the startup something (now or eventually) or if you are looking for a role, then there could be a rational financial justification (sometimes along with a commensurate conflict of interest) to spend your time with very early founders. But if you don’t have some alternative financial interest in working with a very early founder, then there just is no rational financial justification to spend time advising them. There are, however, some irrational justifications.  

Speaking for myself (and others I know in the community), I do it because I want to help the founders, those courageous people taking on the herculean journey of building a company from scratch. I have taken that journey several times myself and I have benefited greatly from the generosity of more-experienced folks who helped me along the way. I do it to give back.

I also do it because I simply love spending time with smart people driven by a vision to solve problems in innovative ways. If you’ve never done it, you ought to try. It’s incredibly satisfying. 

Finally, I do it because I feel like I should… kinda. In his book, Startup Communities, Brad Feld aptly observes that long-term commitment is essential to growing and sustaining a vibrant entrepreneurial ecosystem. 

[For those looking to help build a startup community] the goal is to start finding the other entrepreneurial leaders who are committed to being in your city over the next 20 years.

I co-founded my first startup in 2000 but I didn’t become active as an organizer and mentor until 2006. So by the Feld-ian Framework, I will have met the community-commitment threshold by 2026. 🙂

I understand and I concur with the message Brad was delivering — building great startup communities requires work by real people and it doesn’t happen by accident. It’s sensible to think that longevity and continuity among of those contributing to the community is an intrinsic asset to that community.

But I don’t claim any sort of altruistic credit for having ended up here. What I do is not saintly. I did stuff I thought was interesting, fun and helpful and the Fates made it possible for me to do it for a long time. If anything, it’s a kind of disease. Over the years, some of my own mentors have strongly suggested that I should reevaluate my approach to mentoring and advising because “it’s just not worth it” and “it could impact the success of your own projects.” But I haven’t found the antidote yet. 

But this piece isn’t meant to be an episode of “The Bob Show.” My interest is in exploring the relationship between very early startups, their (often first time) founders and the advisors who spend their time with them. 

A core question on this topic: if spending time with such early-stage founders is financially irrational, then why take stock options at all? Why not just help startups by way of Advising’s vagabond and uncompensated cousin, Mentoring? Doesn’t mentoring get you all the irrational benefits you’re seeking without all the messy paperwork and commitment?

It is an irony that truly being helpful at this early stage requires making a commitment to being informed, engaged and accessible, i.e., exactly the kind of help that good advisors would be irrational to offer. But that’s what advisors at this early stage sign up for. Trajectory. 

Mentors make no such commitment and, as such, are often constrained to providing drive-by advice based on tactical problem solving. While this sort of help from experienced, knowledgeable and connected mentors can be extremely valuable, it is of a different category from the sorts of help provided by committed advisors with a trajectory perspective. 

Along with this trajectory perspective, good advisors also bring patience to help founders learn and improve as founders as opposed to principally satisfying the startup company’s immediate needs of the day. 

For founders at the very earliest stages of their startup, offering stock options to an experienced and committed advisor is not a financial proffer; it is an acknowledgment of the founder’s respect for the value of the advisor’s time and their commitment to the founder’s personal entrepreneurial journey. 

As a founder’s startup makes progress and gets farther from pre-product, pre-revenue, pre-cofounder, pre-funding, pre-everything, the expected value of a startup’s outcome increases and any given advisor’s rationale and motivation for serving as an advisor at those later stages also changes — the Benjamins seem reasonably within reach. 

As each inflection point approaches, the experimental nature of the founder’s idea, product, customer, company, outcome diminishes and execution becomes the order of the day. The advisor role evolves from advising a founder (a person learning to be a founder) to advising a startup (a company looking to grow.) The startup’s outcome becomes less ambiguous and less risky… and advisors are much more easily justified in spending their time with the startup. But early on, there is no clear story to tell about how the Benjamins will ever arrive. And nearly 100% of the time, the Benjamins never do arrive. Building a company is hard. 

Beyond acknowledging the value of an early advisor’s time and the utter unlikelihood that the founder’s first startup(s) will be successful, advisors often just want to play the game along with the founders. And that’s healthy and fair.

In poker (which I know a thing or two about), everyone in the game puts their assets at risk and everyone has something of value to gain. In startup-ville, we refer to this as having “skin in the game.” As it turns out, having even just a little bit of skin in the game (even with very little probability of winning) makes a materially positive difference in how the players conduct themselves. 

Poker fans will recognize the term “free roll,” a poker game played where no one risks anything, i.e., everyone gets a free stack of chips to play with. These games are terrible and knowledgeable or experienced players will not want to participate because no one “plays right.” With nothing at all at stake and nothing to gain, players show no discipline, no strategy, no focus; it just doesn’t matter. 

When a sufficient number of players at a game are not playing “good poker” then even those who would otherwise want to play well simply give up because, as it turns out, it’s impossible to play poker well in a game where the other players don’t care about the outcome. But if you have each player drop a tiny little 10-dollar bill in the pot, all of a sudden the desire to play well abounds. Caring about the outcome, even in a small and seemingly insignificant way, makes a meaningful difference. Giving advisors options gets their skin in the game. It makes them care about the outcome in a different way. It makes them a player too. 

But to be clear, this is not about making advisors feel like they could make a bunch of money if the startup “wins.” If anyone ran the numbers on the risk-adjusted value of those options, they would quickly realize the folly of that notion. This is about connecting the advisor to the founder’s success and making them feel part of it. 

From all this, some interesting conundrums arise. What happens to the advisor who commits their time to a first-time founder when that founder’s company fails and s/he immediately starts the next company? The advisor agreement was with the first startup company, not with the founder. So is the advisor just out of luck if the next company has some success? Legally, the answer is yes, she’s out of luck. But consider the following, more-detailed analysis:

A first time founder, Mark, has an idea and some programming skill. He builds CoolWidget.com but hasn’t yet figure out how to make it a business. Mark meets an experienced and knowledgeable founder, Beatrice, who’s willing to help. They enter into an advisor agreement. Beyond tactical and strategic advice, Beatrice serves as founder coach, helping Mark understand the broader lessons and implications of the tactical and strategic decisions he’s making. Mark thinks highly of Beatrice and is grateful for her help and their relationship. 

CoolWidget.com was a good idea but doesn’t go so well. Turns out that lots and lots of really good ideas are extremely difficult to fashion into good businesses. At about this time, Mark meets Alice, another solo founder with programming skills who built SuperTool.com. SuperTool.com is also a great idea but Alice also hasn’t found commercial success yet. They decide it would be better if they join forces and work together on just one of their startups. Beatrice meets Alice and they all agree that Beatrice would be a great asset as an advisor for whichever company they decide to pursue. Beatrice helps Mark and Alice think though their options. It’s a close call, but Mark and Alice ultimately agree that Alice’s startup, SuperTool.com, is a more-compelling story; Mark sets CoolWidget.com aside and joins SuperTool.com as co-founder. Beatrice continues her role as an advisor for SuperTool.com.

Alas. Building startups is hard. SuperTool.com is truly super, but it struggles to get traction with customers and investors. Failure is the norm for startups so this is not an unusual or even surprising outcome. But the product has been evolving, getting better and aligning with what customers really want. Since Mark and Alice we able to stay in the game as long as they did, they are seeing new opportunities.

A final pivot ensues. This one, GreatPlatform.com, looks good… maybe even great… it could be “the one!” The transition from SuperTool.com to GreatPlatform.com is contiguous in time and team but Mark and Alice go dark for six months while they are heads down building the MVP. Beatrice notices that Mark and Alice haven’t communicated in a while so she pings them: “How are you guys doing??” Mark and Alice: “Thank you so much for reaching out and checking in! We can’t wait to show you what we’ve been working on. Let’s connect soon.” 

Finally, Mark and Alice emerge triumphant. Mark, Alice and Beatrice meetup and, seemingly, pick up where they left off. The new product looks great. In the coming weeks, things move fast for Mark and Alice. Investors are showing interest, customers are lining up. The company gets a new name and a new corporate entity, flushing the previous cap table and all of the baggage of legal agreements.

Mark and Alice’s newest advisor, Mr. Shiny Neu, tells them that they should cut ties with all previous advisors unless they can bring three VCs and a big customer to the table like he did. It’s unclear whether Mr. Shiny Neu would have spent 5 minutes with Mark and Alice over the previous three years, let alone whether he could have gotten even one VC and a small customer to pay attention in those early days when CoolWidget.com and SuperTool.com were fundamentally unfundable.

So they do it. They have a call with Beatrice letting her know that her previous support in getting them to where they are now is no longer a legally binding relationship. “Sorry Beatrice,” they say, “you’ve been great but the company is technically a new legal entity and the product is kinda pretty sorta different and we’re badasses now so we don’t need you anymore.”  

Did anything go wrong here? Or is this just one of the many possible fine and natural outcomes, perfectly in line with the reasonable expectations of founders and advisors and squarely within the letter and spirit of the agreements?

How should Beatrice feel about this? After all, when she started the engagement, she wasn’t doing it “for the money.” And now she’s clearly not gonna get any. So mission accomplished, right? If the answer is “no, that wasn’t the mission,” then how should she change her ways to help prevent this from happening again? Should she just stop spending her valuable time helping nascent entrepreneurs?

How should Mark and Alice feel about this? After all, there is no legal advisor agreement in place for the new company so they cannot have breached any contract, right? Beatrice doesn’t have a legal leg to stand on, right? And they seem to kinda feel bad about it, so that shows they are not sociopaths. In fact, they tell Beatrice that they really like her as a person, are grateful for her time and tutelage and still want to be friends. But, “hey”, they say, “it’s just business.” Beatrice hears, “thanks for everything… now screw you.”  

As a philosophy grad, I was trained to decompose, analyze and understand all of the possible arguments and counter arguments for any given claim. So I can imagine smart and experienced folks disagreeing about what happened here — whether anything was legal or illegal, just or unjust, ethical or unethical, wise or unwise, smart or stupid.

Whatever your take, I have a proposal for your consideration. 

Pro Rata Advisor Agreement 

This agreement would add clauses to a standard advisor agreement that would provide advisors with rights to preserve their vested option base in a successor startup founded by a materially similar founding team. Of course, the agreement needs to be fair to both sides and should not create such an onerous obligation by the founder that it could interfere with other relationships the founder may need to forge later (e.g., bringing on co-founders, investors and other advisors.) Neither is the objective to make a founder into an indentured servant to the advisor. But I think that these constraints can be satisfied. The parameters of the agreement would certainly include:

  • Whether the advisor materially breached the prior agreement.
  • Composition and continuity of the successor founding team. 
  • Length of time between the demise of the precedent startup and formation of the successor startup.
  • Pro rata portion of the advisors equity ownership to be transitioned.
  • Requirements and terms for the advisor to maintain their role and duties as an advisor. 

Bullet points are simple… legal agreements are seldom simple. So there is work to be done here. But is this a basically good idea? Even with a pro rata agreement in hand, it strikes me as still financially unjustifiable to advise super-early founders. But at least everyone involved would be treated fairly. I would be grateful for your thoughts on the notion of a pro-forma advisory agreement as well as any other ideas you have on the topic. 

 

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About Bob Crimmins

Chronic Technology Entrepreneur, Philosophy Grad, Poker Instigator, Dad View all posts by Bob Crimmins

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