How Much Equity Do Startup Advisors Get? If you are creating a startup, you need to bring in a group of advisors in addition to your founders. These advisers should be able to introduce you to potential customers, partners, and investors. The question is, how do you compensate them? How much equity should you give to them? That depends on which stage your project has reached and how much value they are bringing to the table. Many of the considerations discussed here may need to be adjusted to match your situation based on things like the level of funding, the nature of the project, and the number and level of your advisors. Still, all of these are important things for you to consider. Pre-external Funding Your advisors are the ones that are going to help point you to investors. But if you don’t have investors yet, how do you pay your advisors? Before you go looking for investors, you should have some funding already lined up. This is called “pre-external funding.” It usually comes from investments that you and your partners have pooled together. One of the best ways to grow your funding is to give some of your pre-external funding to advisors in exchange for their services. This should be around 1% to 2% per investor. This can go up if you have low funding and few investors, but you shouldn’t pay your advisors more than 10% of your pre-external funding. After all, you have other expenses, and if you give all of your funding to advisors, you won’t have any to develop prototypes and early models that you might need to convince the investors that your advisors bring in. Some funds should also be going into legal fees involving the drafting of contracts between your organization and your advisors, especially if your advisors are being paid in shares rather than cash. This opens up the opportunity for potentially complicated legal content like vesting periods, which will be discussed toward the end of the article. After Seed, Before Angel Raise Ideally, your advisors will help you to identify “angel investors.” Angel investors are wealthy or powerful individuals who are dedicated to helping new businesses to develop. They give seed money to up and coming businesses in exchange for equity in the company. Angel investors are usually, but not always, licensed or certified by some reputable body. As with all of your funding, the lion’s share of the seed money should go into your general funds to pay for expenses and development. However, some of the seed, .5% to 1% should go to each of your advisors. Depending on the structure of your company, you might also have partners that are being paid with these funds who are likely making more than your advisors. Expenses like these can take quite a bit out of your early-stage funding, even when you’re just talking about seemingly small percentages. After Angel Raise When Angel investors are impressed or enthusiastic about your progress, they may increase your funding beyond the initial seed investment. While angel investors understand the nuanced expenses of starting a business, they aren’t giving it to you so that you can pile it on your advisors. Further, unless your advisors are maintaining communications with your angel investors, it’s more your work than your advisors that is impressing your original angel investors. Still, your advisors initially located the angel investors, so make sure that your advisors see some of the raise – around .25% to 1%. After VC Raise It’s not often that angel investors are the sole source of early funding. They usually help to get you off of the ground so that you can have enough of a portfolio to begin attracting venture capitalists. Venture capitalist often comes from firms rather than individuals, though there are individual and independent venture capitalists. Whether an individual or a firm, they fill a similar role to that of angel investors but are usually more interested in funds than in seeing you grow. They usually invest more money but also demand more equity in exchange. Between .1% and .5% of this funding should go to your advisors. This may sound like a small share, but keep in mind that it is likely a larger sum of money than you have previously seen from one source. The source of the funding may also provide some stipulations as to how the funding is supposed to be spent. This may seem restrictive, but it is often a way of guiding small businesses towards wise spending habits that they may not have learned yet. After all, while venture capitalists may seem more cold and calculating than angel investors, your advisors and your partners, they still want your company to succeed and have a history of working with small businesses. They are often seen as simply a source of funding but they can often be a source of guidance as well. Other Sources of Funding Depending on the size and nature of your company, it may be eligible for grants. This is often the case with companies pursuing health solutions or advanced technology. It is also often the case with companies that promise to provide job growth. Some grants can be used to pay figures like partners and investors, but others cannot – the grant will usually specify how funding may be used. Keep in mind that if you do intend on using grant money to pay people, you will be expected to include that in the grant itself, usually in the budget section. Whether you pay advisors with grant funding should also depend on their involvement in the process. If they located the grant or wrote it, they should see a cut. However, if you, one of your partners, or another group identified the grant and wrote the draft, it makes sense not to include advisors on the funding, though this can depend on the nature of the grant. If you would be receiving the funding to promote science, health, &c. It can be wise to not include pay for anyone in the requested budget. If you would be receiving the funding because of your company’s ability to create economic growth, it may be wise to include money for advisors, even if they aren’t involved. Other Kinds of Advisor Compensation Generally speaking, this article has recommended giving each of your advisors a percentage of funding that your business comes into, through your advisors, through the early fundraising process. Recommended payments have been given as percentages of each funding source that your advisors bring in. You can look at this as a commission that you pay your advisors for their work and to keep them involved in your process. When we give these recommended percentages, however, we are assuming that you are not paying the advisors any other sort of cash payment. If you are, subtract these payments from the percentages that we recommend at each step. Further, it is also normal to require advisors to have a “vesting period.” This is a period during which your advisors are receiving shares in your company but do not unconditionally own them. If things don’t work out between you and the advisor by the end of this period, the company can buy back the shares at their original price. This prevents predatory advisors from making money off of your work and the work of other advisors without contributing. Suppose that you have three advisors being paid in shares but operating on a vesting period, which usually lasts between one and three months. If two of the advisors are bringing in quality options and investors and one of them is not, the advisor that is not may see their shares and their value going up despite not having done anything. If you terminate your relationship with that advisor before the end of the vesting period, your company can buy back the shares at their original price. This prevents predatory advisors from trying to gain from the hard work of other advisors, and it recoups your company for the money that it would have lost paying an advisor that didn’t carry their weight. Another way to further incentivize your advisors is through option grants. Option grants allow an individual to purchase a set number of shares in your company at a set price. An advisor that diligently works for the betterment of your company while sitting in their option grants will see the value of shares in your company go up while the price at which they can buy shares stays stable. An advisor that doesn’t work diligently for your company will see the value of shares stay the same or go down and so will not be rewarded by their option grants. No two companies are alike, and this is especially true for startups. As a result, the figures in this article should be seen as suggestions rather than words to live by. The way that your funding should be divided depending on the size of funding, the kind of funding, and where it’s coming from. It should also depend on your expenses, the number of investors, their level of activity, and their level of expertise.
You have the greatest idea for this new killer app. All you need is a somebody who can develop it and some funding to market it. Maybe you talked to a few people to get funding. But it is harder than you thought it was going to be. If this sounds familiar, you are not alone. Here are some reasons why your app is not getting funded, as well as some ways in which you might be able to change your idea or your approach is able to find funding. Your Idea Is Too Small If you have an idea that is totally unique, it could be that the market is too small. This is likely the case if your idea is very specific or solves a very specific problem. Investors invest in ideas that are meaningful to them, but they also invest in ideas that will make money. For an idea to make money, it needs to have a market large enough to make money. If your idea is too specific it doesn’t mean that it isn’t a good idea. It might just mean that investors are afraid that your market won’t be big enough to repay their investment. That doesn’t mean that your idea is dead. Try looking for ways to make your idea applicable to more people. Alternatively, try looking for smaller-scale investors. Smaller investments mean that your app can pay off while making less money. That, in turn, means that it can have a smaller market. You Do Not Have An Unfair Advantage If you’ve been hearing the term “unfair advantage,” it doesn’t mean that you have to lie, cheat, and steal to get your app funded. It just means that maybe your potential investors don’t see you as the best person to make your app. If you want funding for your app, consider expanding your resources. Maybe you aren’t the best person to bring your app to market. That doesn’t mean that you can’t become the best person. Consider talking to local community foundations, chambers of commerce, and business incubators to find out what resources might be available to you. Your Team Is Weak When your investors invest – or don’t — they aren’t just betting on your idea; they’re betting on your team. Your idea can be great but if you don’t have the right team to put it together, finding funding will be hard. If your team isn’t impressing investors, it doesn’t mean that you need to get rid of them. Instead, look for team members or cofounders that can add to the expertise and skills of your current team. If you don’t have a team, you’ll likely need to put one together to attract funders. No Traction Gaining traction can be something of a Catch-22. You have an idea for a product or service, but it needs funding. Some investors might not be interested without knowing that it will move. How do you prove that it will move if it doesn’t exist yet? Consider telling your potential investors about the success of services that approach solving your problem. Then make them understand that your proposed solution will take at least a share from these markets. Illustrating a need is an important part of promoting your solution. Early user-testing with prototypes or minimum viable product (MVP) can also be significant. If you can prove that people want to see your idea in action, that might win over potential investors even if you don’t yet have a working model. It is very unlikely to find a professional investor for pre-product, especially if you are an unproven team. The initial investment for developing an MVP or even complete mobile app is low to warrant an external investment. Normally external investment is earmarked for customer acquisition and expanding the tech team. If you have finished MVP development or the app, look for app developers for equity. You’re Not Sure How to Get Customers Getting customers is harder than it sounds for a new startup. Don’t assume your customers will find you once you create a great app. If you want to attract investors, you’ll need to be able to explain your marketing plan. Dropping vague ideas like “SEO” and “Social Media” probably won’t be enough. Every business that anyone is talking about is using SEO and Social Media. If you have an experienced SEO team working on your content, that’s one thing. If you have a plan on how you will target your adds to get the most out of social media, that’s different. But you have to have a plan. You’re Working Part Time Investors are serious. If they’re going to fund you, they need to know that you’re serious too. It’s hard to look like you’re serious about something if you’re only doing it part-time. You might not be able to quit your job right now, and that’s fine. Maybe it just means that you’re not ready to be looking for serious investors yet. Consider ironing out some more things and looking for big money when you can afford to give your idea your full attention. Alternatively, try to get some full-time co-founders and full-time members of your e-board. They can handle the day-to-day and add legitimacy to your project while you keep working with other things. Whatever you do, don’t give your investors a business card with your employer’s logo on it. You Don’t Understand Your Competition Another reason that you might not be finding funds for your app is that you might not understand your competition. The app market is huge. If your app is going to succeed, you need to know exactly where your app fits into that space. Before you begin looking for funders, be sure that you understand what similar solutions may already exist. It can help to know what companies produce them and how much they cost. Your Product Need Isn’t Validated It could be that you see a need for your app. Maybe you know some people who agree with you. That’s not the same as seeing a marketable need. For your app to make money, it has to have a large enough market to pay for itself. Just like you need to research potential competitors, you need to research the size of your potential market before you begin looking for funding. Your Financial Projections Are Unrealistic Finally, your potential investors may simply not believe that your app is profitable. It could be that they are right. Once again, it can be hard to separate your passion from the cold facts of existing in a market. What to Do Next Investors want to invest. They’re not out to criticize your idea, but they need to believe in it. That means that you need to do your homework and put in some real work on your own before even looking for investors. If you can’t find investors, that doesn’t mean your idea has no hope. You can always consider taking out small business loans or looking into crowd-funding.
Startups can be financially and personally rewarding. They are also a lot of work and may not pay off in the end. Most entrepreneurs, get so many good ideas regularly. So how do you know if a startup idea is worth pursuing? Here we will give a sort of checklist that you can run through. If your idea checks out in these areas, it might well be worth the work to pursue. If it doesn’t check out, it may just need some tweaking, or it may not be worth the effort. Your Startup Should Address A Pain Point Your startup idea should address a pain point. That is to say; it should help people to do something that people want to do. You heard this before – you want to build a startup selling painkiller, not the vitamin. Most people like the idea of vitamins, but there is no urgency. Many people think that this means that their startup needs to solve a problem that no one else has solved before. This isn’t necessarily the case. Sometimes there are already solutions to a problem, but those solutions have their drawbacks. These drawbacks can be the pain points that your idea addresses. Your Startup Should Have A Specific Audience Your startup idea should also have a fairly specific audience in mind. Naturally, this audience will be people dealing with the pain point that your idea addresses. The pain point that your idea addresses and the audience may be closely linked. Perhaps your audience is a subset of the audience of another tool or industry that has a unique problem that existing solutions don’t consider. Maybe there’s a way to solve the problem that your idea solves, but your idea does something better or includes more people. Maybe your idea would approach things in another way, or offer different affordances. Maybe your idea helps to solve a problem that people experience with the current solution because they are disabled, or from a specific background or ethnic group, &c. Identifying this group can help you define your audience for research and marketing purposes. It can also help to keep this group in mind as you set up your company and design your product or services. We’ll talk more about the importance of this group again later.
App development isn’t a one-person job. To make a quality product, you will need to work with partners who can help to fund the project and guide it through all of the steps between idea conception and market success. You will also need developers who can help to make your idea into a functioning and practical reality. The problem that keeps many people up at night is how to get potential partners and developers on board without telling them all of the information that they would need to steal your idea and take it to market without you. This is a sticky problem with lots of room for doubt and lots of potential legal solutions that many people spend. This article will discuss some of the protections that you probably don’t need to spend time and energy chasing, as well as a few key things that you can and should be doing to protect your idea. The Problem with NDAs We don’t want to say that your idea isn’t special, but it can be very difficult to prove that someone stole your idea, even if they turn out the same product, as long as they do simple things like changing the name. Legally, having an idea that is very similar to someone else’s even if you haven’t met, is called “independent invention” and it’s hard to disprove. To win a legal battle, you’d have to prove that the other individual intended to take your idea. This can mean a lot of holding onto emails, recording conversations, and other paranoid behavior that is difficult to maintain, especially if you want other people to sign onto your project. A lot of people opt for an NDA, or “Non-disclosure Agreement” to protect their ideas. It can be hard to word these documents in a way that protects your content, and hard to have them filled out in a way that makes them binding. As you get further along in the development process, and NDA might be a good idea, but while you’re in the early phases of putting a team together, it’s probably more trouble than it’s worth. Finally, there’s the pesky fact that you can’t protect your idea forever. Even if you have a unique idea, you only work with people you trust, and you cover all of the bases to protect your idea legally, it will eventually go public. After an idea has gone public, it becomes even more difficult to prevent competitors from using your idea against you to try to make money for themselves. If you truly feel your invention is unique and it needs legal protection, apply for a patent or even a provisional patent. Provisional patents are an inexpensive way to reserve the option to file a patent within one year. I am not suggesting you file for a provisional patent before sharing your idea. If you are paranoid and is preventing you from proceeding with developing it, it is an option. Your Spirit should be Crucial The fact that nothing stays private forever and that it can be expensive and challenging to protect your idea anyway doesn’t mean that there aren’t aspects of your project that you should try to keep safe. Your idea might be unique or it might not be, but the fact that you are pursuing it and are dedicated to its protection means that your idea must have some special element that would make your app the best of its kind. Whatever element this is is the thing that you most need to protect. Of course, you will still need to share some information on your product with your potential teammates for them to be interested in helping you make your idea a marketable tool. There still should be some element of uniqueness such that the project will not succeed without you. If there is such an element, no one will be able to compete with your product even if they do try to steal your idea. If there is no element of your project that requires you to work, you should be rethinking whether or not your idea would really be a worthy addition to the market in the first place. Protect your Codes and Data In addition to your own experiences and entrepreneurial spirit, there is some hard-copy content that you should keep safe to protect your idea. If there are any algorithms or codes that you have written or any data that you have collected, that is the kind of content that you should pursue legal protection for and keep to yourself for as long as possible. It helps that not all content of this kind should need to go to the same place. While data that you have collected may be an important talking point to get partners to sign up, the partners shouldn’t need to see any code or algorithms that you have written. Similarly, while developers will inevitably have access to codes or algorithms at some point, they shouldn’t need access to any data that you have collected. In this way, you can ensure yourself as necessary to the survival of the product because you will be the only one with all of the necessary pieces to make it competitive on the open market. That doesn’t mean that you have to take any secrets with you to your grave, however. The farther along your project is, the easier it becomes to prove that any proprietary content is yours and the less likely any competitors will be to try to steal anything directly from you. In the end, if you’re losing sleep over your intellectual property rights and how you need to keep them safe from your partners and developers, you’ve probably been watching too many movies. There are always fantastic ways that people could conceivably get at your content and steal your idea and there will always be one more thing that you can do to try to prevent that from happening. In the end, however, sweating over whether your content is secure enough from partners who may betray you or developers who may run off in the night with your information is only going to prevent you from getting people to work with you. What’s more important than having faith in the security of your idea is having confidence in yourself as the only person who is capable of pulling it off. If you have a winning idea that you are truly passionate about and if you bring something unique to the table that can turn that idea into something that will become popular and make a difference in the world, no one will be able to take that away from you.
Recently, Inc magazine published an article predicting the best industry opportunities for entrepreneurs in the coming year. The recommended suggestions are as follows: Biometric Scanning Software, Fraud Detection Software, Corporate Wellness, Sustainable Building Materials, Drone Manufacturing, Virtual Reality, Artificial Intelligence and Food Analytics and Tech. This means that out of the 9 industries believed to be the perfect place for entrepreneurs to invest in for the near future, 6 of them were directly tied to software development. It seems that the author was onto something. After all, the tech industry certainly isn’t going away anytime soon. According to Forbe’s 2016 Global 2000 list of the world’s “largest and most powerful public companies”, 9 of the top 50 were tech companies. No wonder entrepreneurs are scrambling to build startups in the tech field. It is statistics like those shown above that attracts many budding entrepreneurs to choose the tech industry as a career path. However, most business school graduates spent their formative years studying how to build a startup or manage a company, not how to program code. The entrepreneur may have an incredible talent for marketing, managing and maintaining a business, but know next to nothing about how to create the technologies that their new company will rely on. This leaves many potentially successful startups becoming entirely dependent on the ability of the developers they hire, without knowing much about the process. How can someone with an MBA, and minimal knowledge of computers, monitor the progress of software development if they can’t recognize the code? All you can rely on is the result of the final product, which usually isn’t ready to test until after a lot of investments have been made in the individual hired for the project. A lot of entrepreneurs find themselves crossing their fingers and hoping that the months of time and truckloads of investor’s cash won’t be wasted. When a nontechnical entrepreneur ventures into building an app, website or software program, the main challenge can be hiring a good programmer. Hiring the Wrong Programmer Can Have Disastrous Consequences for Startups Most startup founders put a lot on the line when developing software products. There’s usually tens of thousands (and sometimes millions) of dollars on the table. That can add up to a lot of pressure to succeed right away. In today’s fast-paced, highly competitive world, it can feel like all new companies are judged on the grand opening. If it falters during that time, it can be very difficult to pick up the pieces. Imagine having everything on the line, mere weeks from launching the product, only to discover that though the UI looks great, there are numerous issues with the code. At that point, you’ve got zero time and often, no more money left to invest in paying another programmer to fix the problem in time. With such fierce competitors vying for the attention of technology users worldwide, there’s likely to be several companies attempting to create a product like yours. One wrong move, and the other startups will quickly swoop in to take your place. A good example of this is failed startup Wesabe. The online personal finance tool launched in 2007 with almost $5 million in funding. Unfortunately, the startup Mint also launched soon after, with software that was easier to use and better designed. Wesabe didn’t get very far after that and officially closed its doors in 2010. Meanwhile, rival Mint sold their company to Intuit for $170 million. While the reason for Wesabe’s demise is still hotly debated, and likely the result of multiple factors, it’s hard to deny that if Wesabe’s programming and design had been better, there might have been a different outcome. Some Try to Test Out a Programmer’s Skills or Ask Friends for Advice Non-technical entrepreneurs often use many different techniques to avoid hiring bad programmers. Some people will hire other programmers and developers to recruit good candidates for them and may even temporarily employ them for the interviewing and hiring process. Other times, startups will hunt for talented programmers by searching through open source communities to find the “experts” who have already proven their ability to write outstanding code. These are all excellent strategies that can yield good results. Unfortunately, there’s one big piece of the puzzle that many entrepreneurs miss when trying to find a programmer to bring on board. Creating Great Software Takes a Team of Professionals As with most large endeavors, one person can’t do it all. When a single individual takes on too much responsibility, they can become overwhelmed, which creates a lack of focus and helps to develop an environment that isn’t conducive to a high level of achievement. Not to say that a freelance programmer can’t do an incredible job at an assignment or task, but to expect for one person to be responsible for the creation of an entire development project is a dangerous gamble. In normal technology companies, you have product managers, system architects, systems engineers, UI developers, designers, software engineers, project managers and more. In my ten-year tenure at Motorola, I had the chance to work in two of these functions. If you had hired me at that time, I could successfully perform two of these roles. My point is that very few single engineers can do these jobs. To qualify as a full stack developer, you often need to be experienced in only 2-3 of these important functions. Once they begin to develop more skills than that, they are likely to either be very expensive to hire or they will have created their own startup. Often, if a startup fails due to technical incompetence, it isn’t because they hired a bad programmer, it’s because they didn’t hire enough people to cover all the aspects needed to develop a successful product. Therefore, the best way to avoid hiring a bad programmer for your startup is by hiring a development agency. A professional organization will likely employ several individual architects, engineers, designers and developers who are experts in their respective specialties. Rather than relying on one person to wear ten different hats, you can invest in a team that will work collectively to produce a product that your startup can be proud to launch.