Even if you have a technical skill or vision that could form the basis of a successful business, the whole ’how to run a business’ side of things can seem quite daunting. Not surprisingly, therefore, numerous mentors offer their business experience to new entrepreneurs.
At their best, mentors can be a phenomenally useful resource. Regrettably, I often get to see those who have gone over to the dark side and used their superior knowledge of business processes to grab a slice of a promising business before their clients outgrow them. Too often, I see 20% – 40% of a business given away in return for vague mentoring ‘promises’ with few tangible outcomes and invariably no measurable ones.
At worst, dark-side mentors demand a shareholders’ agreement containing technical or arcane legal points that slyly elevate them to equal control of somebody else’s business (but leaving the original founders to do all the work and take all the risk). Clients are always shocked to find themselves in an unwanted but unbreakable partnership with a mentor because of clever legal wording.
Mentors are often in a unique position of trust. Clients assume that their mentors act, if not in their best interests, at least fair and reasonably. Learning otherwise is a huge business lesson, but it comes at one hell of a price.
So, what do you do if you have a mentor demanding not only payment but a stake in your business:
- Buyer beware! It may be a fantastic offer, or it may be the start of your business imploding.
- If you are already paying the mentor, then ask yourself what extra value you will get?
- Put a cash value on the shares demanded. If you would reject a cash offer from an investor at that price, then the mentor’s offer had better be something truly amazing.
- Make any shares conditional upon targets met.
- Don't automatically throw in a directorship with the shareholding; they are separate things.
- Understand the total reward. Monthly payments and capital value of shares and dividends and director status and a say in your business?
- Watch out for a ‘land-grab’. Under the guise of ‘I just want to protect my shares,’ the greedy mentor may demand to be treated as an equal ‘partner’ with the same right of veto as the owners. Again, if someone offered to buy, say, 13% of your company, would you give them all the rights of influence, disclosure and veto over crucial aspects of your business as if they had 51%? If (hopefully!) not, why would you give it to a mentor?
- Make sure you can sack them if a director, and that you can buy back their shares (at fair value) if they are a shareholder.
There are many great mentors, and this article is not trying to dissuade you from using them - but equally you may encounter a mentor who sees you as an exploitable opportunity: so make sure any deal makes hard commercial sense.
Please contact James O’Connell if you need any advice.