funding
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remunerate) an advisor, you can offer him or her a small share of the equity of your new venture. If the advisor likes your idea and believes in it, which is the best groundwork for excellent advisory services, he or she will be receptive to a non-cash remuneration proposal. It is actually a common approach! Many years ago, I was involved in the start up of a project - actually I was able to sit in on meetings when doing my internship in project management while I was still in college. There was a company with a brilliant idea, but the board of directors who were looking for funding had no experience in starting their business. Of course, as I was to learn during the course of the negotiations, this would have catastrophic results during the start-up and funding phase. I saw that the possibility of getting the project going with the help of the investors created such an enthusiastic mindset in the party which was seeking funds, that it was practically an early Christmas for the investors. Here was this project, certainly worth a multiple of millions and the company was merely looking for about half a million to get going. Market studies had been done and the market potential was confirmed, so there should have been a strong confidence on the side of the entrepreneurs but somehow emotions overtook them. In the end, the creator of the product ended up giving away almost 50% of the equity, merely for the promise of funding and business development. For the sake of the example, let us pretend the idea was worth somewhere in the neighbourhood of 10 million (be it Dollars or Euro). The managing individuals were so keen on the funding that they gave up five million and in turn barely received 500,000 in investment. Sure, the risk is much more elevated when you talk about a start-up. It is pure venture capital in the true sense but still, the above example is just one of many where too much capital or equity was given away. Given that the average return on private equity investments has been somewhere in the region of 10% p.a. (in 2005 and 2006) the directors of this particular company overshot the target by far. My personal assumption would be that they gave away at least twice the equity that would have been needed to sway the investor(s) - this may depend 7 4