No, You Should Not Give Advisory Shares to Investors
It’s August 2023.
I should not need to write this post today, yet here we are. 🤦♂️
I recently spoke with a founder who recounted an interaction he had with an angel investor who demanded, as a condition of investment, that he receive “advisory shares” (i.e. shares/options over-and-above those that he would receive in exchange for investing in the company under the standard terms of the round).
…because of all the “value add” he would bring to the table.
Unlike many of my other blog posts, I’m not going to provide a detailed history of advisory shares or a nuanced view of the topic. I’m going to be blunt:
Angel investors or VCs asking for advisory shares as a condition of investment is not okay. Full stop.
It’s not standard. It’s not appropriate. And it’s not acceptable in any tech ecosystem in the world. (At least not by any credible investor.)
I’ll go so far as to say that it’s predatory.
Yet we still see it.
Sometimes it’s from angel investors whose egos are far ahead of reality. Sometimes it’s from VCs in smaller markets who are capitalizing on their de facto monopoly. Sometimes it’s simply greedy investors taking advantage of first-time founders. Regardless of the reason, it’s not okay.
I’ve been both an angel investor and a VC. It is an absolute privilege to be able to invest in startups and work with founders. Unfortunately, some investors lose sight of that. They get so caught up in maximizing their return that they forget one of the most basic truths of startups: providing value is how you gain access to that privilege. It’s the cost of admission.
Yet we still see investors who behave otherwise.
It’s not standard. It’s not appropriate. And it’s not acceptable in any tech ecosystem in the world. (At least not by any credible investor.)
What is acceptable?
Asking for advisory shares and/or cash compensation when the work being performed crosses over into the realm of something you would otherwise pay someone to do. When the investor starts to act more like a consultant / part-time employee.
Some examples:
Performing design/branding/UI work (that you would otherwise pay a designer to do)
Training sales teams or performing sales activities (that you would otherwise pay a sales coach to do)
Designing or implementing a marketing campaign (that you would otherwise pay a marketer to do)
Architecting or implementing product (that you would otherwise pay a developer to do)
Building your fundraising materials or project managing your fundraising process (that you would otherwise pay a consultant to do)
Some of the activities listed above are provided for free by VCs as a means to differentiate.
For angel investors (particularly those who aren’t independently wealthy), it’s not uncommon to develop a consulting relationship with some of the companies they invest in and deliver services like those above.
Having an investor who gets meaningfully engaged with the company is totally okay. Because the investment and the services provided are separate decisions.
That’s not what I’m talking about.
I'm also not talking about situations where advisory shares are negotiated as part of the investment in order to solve cap table issues (a rare but not entirely uncommon occurrence).
What I'm specifically referring to is investors who demand, as a condition of investing, that they receive additional shares or options above-and-beyond what others in the round are getting.
The next time someone asks you for advisory shares as a condition of investment, politely but firmly remind them that you are giving them the once-in-a-lifetime opportunity to invest in your company.
Not the other way around.