Many startup founders attribute their success to mentors and advisors, but how do you compensate those core players in your network?
Founders often ask for advice on how to compensate advisors, and they tend to go with the cash option. Advisor compensation is something that founders find very difficult to manage and often need guidance.
When it comes to cash compensation, the initial advice to founders is that cash in startups should be reserved for services such as legal, accounting, marketing and other outsourcing. However, when it comes to more qualitative support and advice, people helping founders need a more precise alignment of incentives in the form of stock-based compensation.
The excess capital in venture-funded startups has also attracted a litany of coaching services, many of which are excellent. However, there are some operations looking to gain exposure to the growth of tech startups. These coaches They often position themselves as advisers to CEOs and demand significant cash compensation or cash in addition to company stock options.
For good advisors who really want to get their hands dirty and help founders succeed, a results-based lucrative capital package makes a lot of sense.
To create a better sense of alignment, it is recommended that the founders establish certain terms that both parties must meet in order to unlock the value of that capital. For example, founders can implement an award structure that requires advisors to meet certain metrics over time to unlock the value of their compensation, sometimes over many years.
A good example would be an alliance advisor: set goals around the number of alliances in your network. If the advisor meets these goals, he is eligible for compensation. Otherwise, the founder may be protected against dispensing that capital. Again, these coaches, advisors, mentors, or whatever title they wish to have should not be compensated in cash. That's not because cash is more important than equity, but because it's so much harder to tie to results once it's vested.
In one of the most notorious examples of an outside party taking advantage of founders that I have seen, an advisor offered to recruit talent for the startup. He pretended to offer those founders a deal by taking a 50% cash cut off their usual fees, and the company paid him in stock to make up the difference.
The problem arose when he only shared leftover talent from his network, while his all-cash paying clients were the first to get these professionals. These founders ended up learning the hard way that you get what you pay for in the world of services. More importantly, they also learned that advisors need to be held accountable from the start with compensation packages that are aligned with delivering the value founders expect.
For good advisors who really want to “get their hands dirty” and help founders succeed, a results-based lucrative capital package makes a lot of sense. The deal works for them because they get direct exposure to the growth that comes from the task of their work with the founder.
If your work has no impact, there will be no reward on the other side of a liquidity event. On the contrary, if they really make it and help jump-start young businesses, they have likely made life-changing money.
This dynamic works in both directions, and there is no doubt that it makes sense to structure this type of agreement. The advisors are there to generate massive, significant and long-term impacts on the company. If they are able to deliver, then everyone wins. Otherwise, the founders should not have depleted the cash in exchange for negative or even neutral results.
The main types of advisors that take advantage of this relationship with the founders can be seen in Ripple. These advisors tend to be in the recruiting or fractional operations worlds (ie accounting, PR, content marketing, web design, etc.). Founders are often offered high-end services from these providers at very low prices, at cost, in exchange for free start-up capital.
Some advisors may lead founders to believe they will offer top-tier talent, or PR people will say they can connect founders with relevant journalists at leading industry publications. In reality, however, these relationships often fail to generate any return on investment and leave founders frustrated and hesitant to work with advisors again.
To protect their startups from these sharks, founders should always make sure their deals have three mechanisms in place to protect their business.
- First, a one-year return agreement on surrendered stock compensation, so if an adviser leaves them, they can get those shares back.
- Second, a vesting period of two to three years on the share packages. Advisors who resist this have already revealed their true interests and most likely cannot be trusted on the long journey of building a business from scratch.
- And third, a minimum number of hours committed per month to work on start-up or similar for ongoing support.
In addition to those accountability measures, founders should have six-month reviews or check-ins with advisors to make sure they're on the same page with performance and value being delivered. If the advisers fail to meet expectations, the founders should cancel those adviser agreements as soon as possible and not grant any stock options under their agreements.
The goal is not to dissuade founders from hiring advisors. Good founders almost always have a network of great advisors who act as sources of wisdom, inspiration, tactical support, and many other basic assets. No founder is an expert in every domain, and as they embark on the journey to get their businesses off the ground, they need external support.
Trying to manage everything internally from the start is a poor approach. Advisors are a core component of the startup ecosystem and deserve the necessary compensation for the value they provide, but with the current frenzy in the market, it's more important than ever for founders to manage these relationships carefully to maximize results for both. parts.
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