The best founders often attribute their success to a deep bench of mentors and advisors, but how do founders compensate these core parts of their network?
I see tons of founders being asked to compensate advisors with hard cash, and I’m immediately shocked to hear they have graciously agreed to do so. Advisor compensation is something founders find very difficult to navigate and I am often asked for my two cents.
When it comes to cash compensation, my initial response to founders is that cash at startups should be reserved for services like legal, accounting, marketing and other outsourced contractors. However, when it comes to more qualitative support and advice, the people helping founders need a more accurate alignment of incentives in the form of equity-based compensation.
The excess of capital in venture-funded startups has also attracted a litany of coaching services to the space, many of which are great. There are, however, a few operations out there that are angling to get exposure to the growth in tech startups. These coaches often position themselves as advisors to CEOs and either demand significant cash compensation or cash in addition to equity options from the company.
For good advisors who truly want to get their hands dirty and help founders succeed, a lucrative equity package based on results makes a ton of sense.
In order to create a better sense of alignment, I recommend that founders put in place certain terms that both parties must meet in order to unlock the value of that equity. For instance, founders can implement a vesting structure that requires advisors to meet certain metrics over time in order to unlock the value of their compensation — sometimes over many years.
A good example would be a partnership advisor: set goals around the number of partnerships from their network. If the advisor meets these goals, they’re eligible for the compensation. If not, then the founder can be protected from deploying that equity. Again, these coaches, advisors, mentors or whatever title they wish to hold should not be compensated in cash. That’s not because cash is more important than equity, but because it is much harder to tie to outcomes once it has been awarded.
In one of the more egregious examples of an external party taking advantage of founders that I’ve seen, an advisor offered to recruit talent for the startup. He purported to offer those founders a deal by taking a 50% reduction in cash relative to his usual rates, and the company paid him in shares to make up the difference.