We get a lot of questions that have “simple answers” and “more complex answers.” It’s kind of like life – and the simple answers usually trump the more complex ones. For example, I received the following question the other day by email.
I’ve been working on a startup concept for many months now. I have NO experience with anything like this but the concept seems to have alot of potential and is beginning to gain some traction. I sought out a business “coach” to help me present the project effectively. She is very excited about the concept and claims she will put everything together. Financial projections, web site, investors, etc., etc. Because I can’t afford to pay hourly for her services she will work for 1-2% of gross profit. Sounds expensive but I have no idea what these deals typically look like. Does this sound fair? Could a commitment to this adversely affect later funding rounds? Any thoughts or references would be greatly appreciated.
I wrote back with the following “more complex, but not complete” answer.
That’s extremely expensive. Gross profit isn’t really the right thing for her to be working for. She should be asking for “equity.” 1% – 2% of the company for putting together financial projections, web site, and investors is certainly reasonable (especially if it includes investors), but I’m not really sure what that means – people often promise a lot and then deliver very little. You should – at the minimum – talk to other people she has worked with before to do this and ask how it worked for them.
After I pondered the response, it occurred to me that there was a simpler answer.
Boy – that sounds sketchy to me. Before you spend any more time with this person, I’d check her references. Ask her for five other people that she’s done this for – especially the “put together the investors” part – before you agree to anything. In addition, (longer answer about equity vs. gross profit follows…)
If you’ve just met with someone and they offer you something that sounds too good to be true, as the cliche goes, it probably is.
