When mentors turn to the dark side

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, new entrepreneurs often turn to one of the many mentors offering their business experience to start ups/SMEs.

More often than not, mentors can be a phenomenally useful resource.

Regrettably though, I regularly get to see cases involving those who have gone over to the dark side. They have used their superior knowledge of business processes to grab a slice of a promising business before their clients outgrow them. Too often I see 10% – 30% 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 also demand a shareholders’ agreement containing technical or arcane legal points that slyly elevate them to equal control of somebody else’s business on key issues (but of course leaving the original founders to do all the work and take all the risk).

This is done by them demanding a right of veto over key matters like: the issue of new shares, taking on debt, appointing a new director or sacking an existing one, changing business direction, being a bank signatory, etc.

Clients are always shocked to find themselves in an unintended, unwanted and all but unbreakable partnership with a mentor because of arcane legal wording.

In my experience predatory mentors get away with this because they abuse the unique position of trust they often hold.

Clients assume by default that their mentors act, if not in their best interests, at least fair and reasonably. Learning that, to some, mentoring is just another business opportunity to be exploited, is a valuable business lesson: but one which comes at a hell of a price.

So, what do you do if you have a mentor demanding not only payment but a stake in your business?

My default advice is, if in any doubt, walk away. Their demand is not normal and it is for them to justify, not for you to find grounds to demure.

More specifically:

• Buyer beware! This is an important issue - it may be a fantastic offer, or it may be the start of your business dream unravelling.
• If you are already paying the mentor (remember, many do it for free as a way of paying on for the help they received), then ask yourself what extra value/benefit you will get for the gift of shares? What more will they do, what wisdom are they holding back on that they are now dangling in front of you?
• 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 fee plus capital value of shares plus dividends from those shares plus director status plus a founder level of veto over key issues is one heck of a benefits package!
• 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 (see above). 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.
• Make sure being a director does not tip them over the line into being viewed as an employee by HMRC.
• Get the deal in writing.

There are many, many great mentors, and this blog is not trying to dissuade you from using them - but equally you may encounter a mentor who sees you as just the latest exploitable opportunity: so, make sure any deal makes hard commercial sense.

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