Much of my work these days is in the form of advising relatively early stage companies. I have four models I use:
For very early startup companies (pre-funding) I work for free. Mainly (but not exclusively – sometimes it’s with friends, or friends of friends) I do this via Springboard, the London-based Accelerator that goes from strength to strength. Sometimes these relationships lead to one of the three other scenarios below, but mainly not and that’s not my motivation – it’s just a small contribution to the tech ecosystem and I really like doing it.
2. Stock Options
Sometimes, early stage startups are keen to work more formally and want to deepen the relationship. In this case, the model is stock options, as cash needs to be conserved for other priorities. Again, some of these lead to an investment from Ballpark Ventures (the investment fund that I belong to). But it’s not an automatic thing and shouldn’t be the motivation for the startup.
By the way, if you’re considering employing an advisor, there’s a very useful “rate card” about how many stock options you should consider paying them developed by the Founder’s Institute. You can download it, along with a recommended Draft Compensation Agreement here. Be very careful about over-paying advisors and be especially wary of people asking for more than the recommended above – especially ridiculous amount like 5% or even more. Many a founder has over-rewarded people who do little more than lend their names to a startup and never really add any real value. I’d love to see these sorts of people cut out of the value chain in UK startups.
If Ballpark has invested in a company, you automatically have a bunch of senior been-there-done-that successful business people rooting for you and available to add what value we can. We like to be actively involved, otherwise we might as well just stick the money in a listed company.
Sometimes, if the advisor role is involved in terms of time, more stock options might be available and at a later stage, as the company grows, there may be a Board Fee paid as well.
By the way, Ballpark currently has a bunch of blokes as partners/investors. We’d dearly love to get some women involved, so if anyone knows anyone, we’d be very keen to talk.
4. Non-Exec Director
The final model I work with is a traditional NED. I don’t make an investment, but I’m paid a small monthly fee, plus stock options. These companies are normally slightly more mature, will certainly have raised some money and are on their way to success.
You will note that in 1, 2 and 4 that it’s very clear who is in charge in that relationship – it’s the startup and the entrepreneur. I might be more experienced than the team, but I can be held accountable at any stage, in the same way as any employee. I can be told to up my game if I’m not delivering what we have agreed and ultimately get fired.
However, if I’m working in scenario 3, it’s not so clear. I’m the boss in the sense that they are using my money and I have certain influence on the company because of that investment. But equally, the entrepreneur is also in charge as far as the advisory role is concerned. So the relationship is very blurred. Can you “fire” an investor? It’s further confused by the inherent conflict of interest that can naturally arise between investor and an advisor – particularly when it comes to further funding, expansion and eventual exits.
I’ve given this a lot of thought over the last year, based on real experience and I believe that if I was the entrepreneur, I would like some of the NEDs in my company to be independent, the relationship defined and clear and retain my ultimate sanction of being able to fire under-performers.
From the NED point of view, it keeps you on your toes, makes sure that you don’t over-extend commitments and drives you towards excellence and delivering value.
And yet, the prevailing view among entrepreneurs and their existing investors seeking to strengthen their Board is to get advisors to invest and not pay them. There is a belief that if the advisor has “skin in the game” they’re likely to perform better. Skin in the game in this context is clearly meant to be fear-driven, as reward-driven can be achieved by offering stock options on an earned basis.
I really challenge this view and would welcome discussion among anyone who has experience in this area – or just firm opinions.
What I can say is that when I agree to advise a company, I’m putting my reputation on the line, my career doing this kind of work, I desperately want the company involved to succeed as I only work with people I like and respect – and I have stock in the company. This is very strong motivation and seems to work very well. The skin in the game seems unnecessary on the one hand and has the considerable downside of cluttering up the company with under performing advisors, who sometimes have a conflict of interest when it comes to big, potentially life changing decisions.
What do you think?