Should I offer cash or equity to a startup advisor? Cash whenever possible, and equity only if you truly must.
As a general principle, offer cash/commission to people helping you close a one-off deal (like raising a round) and only offer advisory equity to people you’re confident are going to be ongoing advisors to the business, and even then, only when you can’t afford them on a retainer, project fee or commission basis.
But I can’t afford to pay!
Short of cash? Of course you are. But remember: in the early days, it’s easier to earn more money to put into your startup than it is to raise capital at an increased valuation for it.
Offer short term incentives for short-term help, and long term incentives for ongoing help, otherwise you’re creating misaligned incentives.
Cash is a short-term incentive — as soon as your advisor has spent it on his boat mooring fees, it is no longer an incentive. Equity is a long-term incentive — worth next-to-nothing now and hopefully worth a lot more sometime in the future.
The barnacle on your cap table
You don’t want anybody on your cap table who isn’t aligned with you on building the long term value of the business.
Someone who would actually have preferred cash and who instead is holding shares for something they did for you in the past is less likely to contribute to the company. Worse, they’re a burden you can’t easily shake.
Until you (or a future investor) has bought out their shares, they will act like a barnacle on the hull of your business – always slowing down your progress, not adding value, adding friction to future cap raises, shareholder meetings and majority decisions. They want their money out and won’t be happy until they get it.
The longer they remain un-exited from your startup, the more you and they will differ on your perception of the value of the work they did to earn those shares.
They’ll be thinking, “Dammit, why did I even do that work for that startup years ago? They were nothing but a pain in the bum. And they’d be nothing without the help I gave them. Yet what have I gotten for it? Absolutely nothing!”
And you’ll be thinking, “Why are they such a pain in the arse? I avoid speaking to them as much as possible because if I could wind back the clock, (a) I would have chosen someone else to do it, (b) no way it was worth what I paid for it; and (c) if I’d just waited a little longer, we could have figured out how to do it ourselves. I know they just want me to buy back their shares but I don’t want to — why should they be the first ones to get their money out?”.
It rarely ends well.
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