Paying mentors in equity for their introductions – a novel element in startup deals
While Accelerators expect 6-8% equity in return for participation in their programmes and angels expect to earn their turn on their own investments in startups, mentors whose many different kinds of contribution are arguably at least as significant have been expected to work for love*.
Experience suggests that one of the most vital needs for an entrepreneur is for introductions to contacts who are potential users and potential customers – as people whose knowledge and experience can contribute outstandingly to the development of a new product or service. But mentors are naturally cautious about imperilling their own relationship with their good contacts.
A new kind of offer is expected to bring this process into line with other supporters of startups. A well-connected mentor has offered to a startup to introduce the latter to five key contacts over a short period of time, in return for two and a half per cent equity, a half per cent for each introduction. Each party could disappoint on one round without abrogating the deal; and either party could opt out of the agreement early at the conclusion of any of its stages; so that if either side had two (or more) disappointments, it was possible for the deal to be abandoned. (The mentor had undertaken to name in advance the organisations to which the first contact was attached.)
This kind of deal is important for entrepreneurs whose projects are of a disruptive nature and/or in fields with which they are unfamiliar as are those of many startups.
* Though EU funding has recently been made available through Capital Enterprise for mentors and other supporters in London-based Accelerators.