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 they compensate these core parts of their network?

I am shocked to hear that many founders have agreed to compensate advisors with hard cash. I am often asked for my two cents on advisor compensation, which is very difficult to navigate.

When it comes to cash compensation, my initial response is that cash should be used for services like legal, accounting, marketing and other contractors. 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.

Many of the coaching services to the space are great because of the excess of capital in venture-funded startups. Some operations are trying to get exposure to the growth of tech startups. These coaches often demand significant cash compensation or cash in addition to equity options from the company in order to position themselves as advisors to CEOs.

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 structure that requires advisors to meet certain metrics over time in order to unlock the value of their compensation.

An example would be a partnership advisor who has goals for the number of partnerships in their network. The advisor is eligible for compensation if they meet their goals. The founder can be protected if that equity is not deployed. Again, these coaches, advisors, mentors or whatever title they wish to hold should not be paid in cash. Cash is more important than equity because it is harder to tie to outcomes once it has been awarded.

An advisor offered to recruit talent for the startup in one of the more egregious examples of an external party taking advantage of founders. The company paid him in shares to make up for the difference after he claimed to offer them a deal by taking a 50% reduction in cash.