The Importance of Getting Advisors to Invest in Your Startup

If there’s one piece of startup advice that’s ubiquitous in Silicon Valley, it’s this: “Fail fast, fail often.” While this advice isn’t inherently bad, it often gets lost in the hustle to get things done quickly. Founders may focus too much on the short-term and neglect careful planning. Indeed, it’s crucial for startup founders to be resilient and learn from their failures. But what if you could avoid some of those failures altogether? One of the best ways to do that is by leveraging the experience of a startup advisor—ideally, one who invests in your startup from the outset.

Choose Advisors Like You Choose Co-Founders

Startup advisors are neither mentors nor employees. They are peers who are a few steps ahead of you in the entrepreneurial journey. These advisors have stood where you stand now and have seen what works and what doesn’t. Their insights can help you avoid common pitfalls and accelerate your path to success. Therefore, having the right advisors is critical. They provide fresh perspectives and diverse advice that can help you tackle problems more effectively.

However, not all advisors are created equal. The best advisors are typically those who are 3-5 years ahead of you in the same industry (Harvard Business Review, 2022). Their advice should complement your knowledge and experience as a founder. When searching for an advisor, look for someone who offers tactical and strategic advice, can filter out problems, and help prioritize. They should also complement your strengths and mitigate your weaknesses.

Shift the Equation: Get Advisors to Invest

One often overlooked aspect of forming relationships with startup advisors is their time and commitment. Advisors have their own businesses and personal lives, and their availability can vary. A great way to ensure their commitment is to require them to invest in your startup. This approach quickly filters out those who are only interested in collecting company shares and ensures that your advisors have a stake in your success.

Bypass the Investor Spectator Mode

By getting startup advisors to invest, you turn them from passive spectators into active participants. As shareholders, they have a vested interest in the company’s performance. This financial investment means they will be more engaged and provide more genuine feedback. Additionally, their investment allows them to better understand the company’s financial management, leading to more informed advice.

The Investor/Advisor Domino Effect

When a startup advisor invests, it creates a domino effect. Their investment builds credibility for your startup, attracting more investors and suitable advisors. An announcement of an advisor’s investment signifies confidence, making your startup more attractive in the eyes of other potential stakeholders. In the early stages, building credibility is challenging, but an advisor’s investment can jumpstart this process.

More Than Just Advisors

Advisors who invest in your startup become more than just advisors. They become actively involved in your business’s growth and are more likely to offer substantial support. If an advisor isn’t willing to invest financially, they may lack the incentive to stick around for the long haul. Ideally, the advisor-founder relationship should be dynamic and flexible, with advisors showing genuine interest and enthusiasm for your company’s success.

Putting Their Money Where Their Mouth Is

Advisors who invest are more likely to allocate their time and resources effectively. Their investment motivates them to go above and beyond to help you manage business activities. Founders who partner with investing advisors gain significant leverage through their advisors’ expertise in recruitment, planning, and budget allocation. These advisors often take on some of the workload themselves, helping to clarify and reaffirm your company’s core business objectives.

Access to a “Golden Fleece” of Resources

Investing advisors bring with them a wealth of resources, including experience, advice, and a broad network of investors and industry experts. This network can provide invaluable support, helping your startup thrive. As a founder, you gain access to their extensive network, making investment and good advice more readily available alongside mentorship.

Final Thoughts

Having an excellent advisory network is as crucial as having capital for startups. As a founder, your job is to secure your company’s growth, and finding the right advisors is one of the best things you can do in the early stages. Good startup advisors provide a solid foundation for your company and help you make better decisions. Getting your advisors to invest further solidifies this relationship, giving your startup a unique edge over the competition and fostering accelerated growth and stability—key factors in the success of any startup.

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FAQ

Why should startups ask advisors to invest money in the company?

Advisors who invest their own capital demonstrate genuine commitment and align their interests with the startup’s success. Financial investment creates stronger accountability than equity-only compensation, as advisors become stakeholders with real financial risk. Studies show that startups with invested advisors receive 40% more active engagement in strategic decisions and introductions (Harvard Business Review, 2021). This investment also validates the advisor’s confidence in the business model to potential investors.

How much should startup advisors typically invest?

Startup advisors typically invest between $10,000 and $50,000, depending on the company’s stage and the advisor’s financial capacity (PwC, 2023). Early-stage startups often accept smaller investments of $5,000 to $25,000, while growth-stage companies may expect $25,000 to $100,000. The investment amount should be meaningful enough to ensure commitment but not so large that it creates conflicts of interest or unrealistic expectations about control and decision-making authority within the company.

What equity percentage should advisors receive when they invest in a startup?

Advisors who invest capital typically receive equity based on the startup’s current valuation, separate from advisory compensation. Standard advisory equity ranges from 0.25% to 1% for early-stage companies, vested over two to four years. When advisors invest at the same terms as other investors in a funding round, they receive pro-rata equity based on their investment amount. Some startups offer advisors a discount of 10-20% on the share price as recognition of their dual contribution.

What are the risks of having advisors invest in your startup?

Advisor investments can create conflicts of interest if they expect board seats or excessive influence beyond their advisory role. Financial stakes may complicate the relationship if the advisor becomes overly focused on short-term returns rather than strategic guidance. Additionally, accepting advisor investments without proper documentation can lead to legal complications during future funding rounds. The SEC requires clear disclosure of all investor relationships, and institutional investors may scrutinize advisor investment terms during due diligence processes.

How do advisor investments differ from angel investments in startups?

Advisor investments combine capital contribution with ongoing strategic guidance, while angel investments focus primarily on financial returns. Advisors typically invest smaller amounts ($10,000-$50,000) and receive additional equity compensation for their advisory services, whereas angel investors contribute $25,000-$100,000 or more purely for equity ownership. Advisors maintain active, operational involvement through regular consultations, while angel investors generally take a passive role with quarterly updates. Both participate in funding rounds at standard terms.

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