Entrepreneur In Residence (EIR) Pitfalls

I've got a number of friends who have been entrepreneurs in residence (EIR) at a venture firm, or are currently an EIR. In most (but not all cases), they're not sure they'd do it again. Another group of friends asks: "I've got an EIR offer", should I do it? I've considered a number of EIR offers, but I've never done one -- I'm not sure they're always a great deal for the entrepreneur.

EIR arrangements vary from firm to firm. Typically, the entrepreneur gets an office and treats it as a full time job. The EIR usually doesn't participate in the partner meetings, but otherwise spends a lot of time helping the partners look at deals and brainstorming new projects. Sometimes, the EIR will get paid a nominal salary, and I've heard rumors of cases where the EIR gets a very small carry in the current venture fund.

The idea is to form an arrangement of mutual benefit. The venture firm gets an extra pair of eyes to help sort through new deal pitches. The EIR gets exposed to a bunch of new ideas that can nominally simulate entrepreneurial thinking. In some cases, a deal comes in that needs a co-founder with the EIR's background, and the EIR joins the project up full time. In other cases, the EIR forms an idea, and the venture group helps to develop and eventually fund it. In other cases, the EIR finishes up and moves on.

What's wrong with this?

The subtlety is in the quid pro quo. As a result of the arrangement, the venture firm expects an option to invest in whatever the entrepreneur does. Sometimes this is formalized (especially if the firm is paying a salary), sometimes it isn't. I've seen cases where the EIR's accumulated compensation is convertible at a discount into the first round (e.g. the salary is effectively an advance against the first round of funding).

The problem is that the venture firm effectively has an option to buy without any corresponding obligation. If an EIR comes up with an idea, the firm has no obligation to fund it -- they just want to look at it first. If they pass, and you take it to another group, you're starting from a well-publicized rejection point (e.g. "why isn't your host funding this?") Worse, this can be very limiting for hot ideas -- you have to take it first to the "host firm", and can't shop it around to get market terms. These situations can get quickly get delicate and awkward.

Other problems include:

• Pollution. It's nice to get a sample of what's going on, but it's easy to get accused later of stealing someone's idea.
• Tagging. As an EIR, you get "tagged" as being part of a particular firm. Venture capital is very competitive and can be very secretive. Other firms usually stop calling, and stop inviting you to their Christmas party.
• Distraction. Everyone's got their own entrepreneurial style, but I see diminishing returns in spending time helping VCs look at deals. I've found it helpful when transitioning off of a project to help "see what's out there", but there comes a point where you need to be working full time for yourself, not for a venture firm.

When can EIR arrangements work? If you need an income, the EIR role can be a good way to pay the bills while working on the next idea. Also, if you have limited venture contacts, and EIR role will help you get better connected with a venture firm. Finally, if you are more of an "execution" type and not an "idea" type, an EIR role may be a good way to quickly see a bunch of candidate projects before joining up with one. (These situations are probably more accurately called "Executive in Residence".)