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Ask HN: Fundraising compensation

4 points by ebitda_ai 9mo ago

A friend and I have been working on a fintech prototype for the past three years. We’ve built the AI, developed a working demo, and are now at the stage where we need capital to cover licensing and move toward commercialization. An experienced advisor—who has had two to three successful exits—has offered to help. He would lead the deck creation, handle pitching, and raise approximately $4–5 million from his network(other VCs). If his health permits, he may also join the company full-time afterward. What would be an appropriate compensation structure in this situation? He is asking for 5% equity and 5% cash compensation.

gus_massa 9mo ago
> and raise approximately $4–5 million from his network(other VCs) Is that real green cash in the bank or pie in the sky promises?
- ebitda_ai 9mo ago
  Green cash. That's the deal, he proposed as a % of money raised, with kickers for the amount and valuation maxing out as 5% of cash and 5% equity if he reaches at least $4 mil on a $20 mil post-money valuation.
urcturpurs 9mo ago
Structure it as an X for Y thing for a % of equity vs how much the bring in. Does 5% cash comp mean they’re going to get 5% of the raise amount? No VC would be ok with 5% of their investment going str8 to a middleman - if they find out. That’s coming out to maybe 2-3 months of your runway gone immediately. Beyond that the CEO of the startup is responsible for raising capital - you must build that skills from the beginning. (Raising $2m on a $10m cap safe is not too hard if you’re serious about it and have some interesting insight)
- ebitda_ai 9mo ago
  Can you emphasize "Structure it as an X for Y thing for a % of equity vs how much they bring in." Not sure if I follow. Assuming he does the entire round, then I'll end up with $4.75 mil on $19 mil "after fees." If I counter him with 5% cash + up to 1.5% equity, that would put it at $4.75 on $22 mil val "after fees", would that make sense?
fzwang 9mo ago
IMO, the proposed 5/5 compensation is a bit high. If I understand correctly, he's essentially asking for approx $1.2M total comp package for raising $4M. I'd suggest 2.5% and 2.5%, or some combination of. There are terms other than valuation which are very important (board rep, liquidity pref, etc). Have you talked about what are the must haves and deal breakers for you and your team? IME, the bigger issue in the long run with this situation is that you, the founders, do not have a direct relationship with the investors. These investors will most likely be "his" investors, which positions him as a key intermediary. This will be a problem in the future when you need to manage them and must go through a middle man. The CEO should ideally lead the pitch and an advisor can help with coaching, networking, and strategy (and be well compensated for it). I think any competent VC will want to see that at least one of the founders can do sales.
TeamCommet1 8mo ago
IMHO if I were you, I wouldn't take the deal. This structure is a red flag for most tier 1 VC. Here's why: 1. Equity Standards: 5% is astronomical for an advisor. Standard advisor equity is 0.1% to 0.25%, maybe 1% if they are practically a part-time Co-founder. 5% is what you give a late-stage Co-founder or a very early C-level hire, not someone just for 'making intros.' 2. The Signaling Problem: VCs invest in you, the founders. If an advisor is leading the pitch and handling the fundraising, it tells VCs that the founders can't sell their own vision. VCs want to see the CEO pitching, not a "hired gun". 3. Vesting: Any equity given must be on a 4-year vest with a 1-year cliff. If he gets 5% up front and then his "health doesn't permit" him to join, you've just dead-capped 5% of your company for a deck and some emails. If he really believes in you, he should invest his own money or take a much smaller advisor slice (1% max) with zero cash fee.

4 points by ebitda_ai 9mo ago

gus_massa 9mo ago

> and raise approximately $4–5 million from his network(other VCs) Is that real green cash in the bank or pie in the sky promises?

ebitda_ai 9mo ago
Green cash. That's the deal, he proposed as a % of money raised, with kickers for the amount and valuation maxing out as 5% of cash and 5% equity if he reaches at least $4 mil on a $20 mil post-money valuation.

urcturpurs 9mo ago

Structure it as an X for Y thing for a % of equity vs how much the bring in. Does 5% cash comp mean they’re going to get 5% of the raise amount? No VC would be ok with 5% of their investment going str8 to a middleman - if they find out. That’s coming out to maybe 2-3 months of your runway gone immediately. Beyond that the CEO of the startup is responsible for raising capital - you must build that skills from the beginning. (Raising $2m on a $10m cap safe is not too hard if you’re serious about it and have some interesting insight)

ebitda_ai 9mo ago
Can you emphasize "Structure it as an X for Y thing for a % of equity vs how much they bring in." Not sure if I follow. Assuming he does the entire round, then I'll end up with $4.75 mil on $19 mil "after fees." If I counter him with 5% cash + up to 1.5% equity, that would put it at $4.75 on $22 mil val "after fees", would that make sense?

fzwang 9mo ago

IMO, the proposed 5/5 compensation is a bit high. If I understand correctly, he's essentially asking for approx $1.2M total comp package for raising $4M. I'd suggest 2.5% and 2.5%, or some combination of. There are terms other than valuation which are very important (board rep, liquidity pref, etc). Have you talked about what are the must haves and deal breakers for you and your team? IME, the bigger issue in the long run with this situation is that you, the founders, do not have a direct relationship with the investors. These investors will most likely be "his" investors, which positions him as a key intermediary. This will be a problem in the future when you need to manage them and must go through a middle man. The CEO should ideally lead the pitch and an advisor can help with coaching, networking, and strategy (and be well compensated for it). I think any competent VC will want to see that at least one of the founders can do sales.

TeamCommet1 8mo ago

IMHO if I were you, I wouldn't take the deal. This structure is a red flag for most tier 1 VC. Here's why: 1. Equity Standards: 5% is astronomical for an advisor. Standard advisor equity is 0.1% to 0.25%, maybe 1% if they are practically a part-time Co-founder. 5% is what you give a late-stage Co-founder or a very early C-level hire, not someone just for 'making intros.' 2. The Signaling Problem: VCs invest in you, the founders. If an advisor is leading the pitch and handling the fundraising, it tells VCs that the founders can't sell their own vision. VCs want to see the CEO pitching, not a "hired gun". 3. Vesting: Any equity given must be on a 4-year vest with a 1-year cliff. If he gets 5% up front and then his "health doesn't permit" him to join, you've just dead-capped 5% of your company for a deck and some emails. If he really believes in you, he should invest his own money or take a much smaller advisor slice (1% max) with zero cash fee.