The finest founders frequently credit their success to a strong network of mentors and advisers, but how do they compensate these vital members of their team?
I see a lot of entrepreneurs being asked to pay their advisors in cash, and I’m always surprised when I hear they’ve generously consented. Founder remuneration is a challenging subject for them to handle, and I am frequently asked for my opinion.
When it comes to monetary compensation, my first response to founders is that cash should be reserved for outsourced services such as legal, accounting, marketing, and other outsourced contractors at startups. When it comes to providing more qualitative support and guidance, however, those assisting founders require a more precise alignment of incentives in the form of equity-based pay.
The abundance of funding in venture-backed firms has attracted a slew of coaching services, many of which are excellent. However, there are a few businesses out there who are hoping to profit from the rise of tech companies. These trainers frequently pose as counsellors to CEOs and demand large sums of money or cash in addition to stock options from the company.
I urge that founders put in place specific parameters that both parties must satisfy in order to unlock the value of that stock in order to generate a stronger feeling of alignment. For example, founders can use a vesting structure to compel advisers to fulfil particular benchmarks over time in order to unlock the value of their remuneration—which can take years.
A partnership adviser, for example, could set targets based on the number of partnerships in their network. If the adviser achieves these objectives, they will be entitled to pay. If it is not the case, the founder may be barred from using that stock. Again, these coaches, advisors, mentors, or whatever else you want to call them, should not be paid in cash.
This is not because cash is more important than equity; rather, it is considerably more difficult to link cash to outcomes once it has been granted.
An advisor volunteered to recruit people for the startup, in one of the more egregious examples of an external party taking advantage of founders that I’ve seen. He claimed to have made a deal with those founders by taking a 50% cut in cash compared to his typical rates, and the company compensated him with shares to make up the difference.
This is not because cash is more important than equity; rather, it is considerably more difficult to link cash to outcomes once it has been granted.
One of the most egregious examples of an outside party exploiting founders that I’ve seen is in the case .
