How to strategically manage your startup advisor’s compensation

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.

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.

The problem arose when he only shared the scraps of the talent in his network while his clients that were paying entirely in cash got first dibs on these recruits. These founders wound up learning the hard way that you get what you pay for in the service world. More importantly, they also learned that advisors need to be held accountable up front with compensation packages that are aligned with their delivering the value that founders are expecting.

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. The deal works for them because they get direct exposure to the growth they are tasked with achieving through their work with the founder.

If their work isn’t impactful, there won’t be any reward waiting for them on the other side of a liquidity event. Conversely, if they really nail it and help propel young companies into the stratosphere, then they’ve likely earned life-changing money.

I’ve seen this dynamic manifest itself in both directions, and there’s no doubt that it makes sense to structure these types of deals this way. advisors are there to make massive, long-term, meaningful impacts on the company. If they are able to deliver then everybody wins. If not, founders shouldn’t have drained their cash in exchange for negative or even neutral results.

The primary types of advisors taking advantage of founders that we have seen at Ripple tend to be in the recruiting or fractional operations worlds (i.e., accounting, PR, content marketing, web design, etc). Founders are often sold on high-touch services from these providers at bargain prices in return for free equity in their startup.

Recruiters will make founders believe they will deliver top-tier talent, or PR people will say they can connect founders with high-profile journalists in industry-leading publications. However, in reality, these relationships often fail to deliver any return on investment and leave founders frustrated and hesitant to work with advisors ever again.

In order to protect their startups from these advisor sharks, founders need to always make sure their advisor agreements have three mechanisms for protecting their startups from grifters. First, a one-year cliff on equity compensation, so if an advisor leaves them hanging, they’re able to recoup those shares. Second, a two- to three-year vesting period on equity packages. advisors who balk at this have already belied their true interests and most likely cannot be relied upon in the long journey to build a company from scratch. And third, a minimum number of hours committed per month to work with the startup or similar proof of ongoing support.

On top of those accountability measures, founders should have six-month reviews or check-ins with advisors to make sure they are on the same page with the performance and value being delivered. If advisors are not fulfilling expectations, founders should cancel those advisor agreements before the one-year anniversary and not award any equity options as per their agreements.

The point of this post isn’t to discourage founders from taking on advisors. I believe that good founders almost always have a network of great advisors who act as sources of wisdom, inspiration, tactical support and many other fundamental value-adds. No founder is an expert in every domain, and as they undertake the journey of getting their companies off the ground, they need to have outside support.

Trying to bring everything in-house from the start is a poor approach. Advisors are a core component of the startup ecosystem and they deserve requisite compensation for the value they provide, but with the current craziness in the market, it’s more important than ever that founders manage these relationships carefully to maximize the outcomes for both parties.