When advisors stop being useful but walk away with a piece of your business
The last startup I worked for — a home swapping platform — were founded by first time founders. As they scale and wanted more growth, they explored options of going into C2C rentals.
They hired an external advisor to help fill the in-house skill gap on rentals market. Advisor was paid 0.3% equity with 6 months cliff and a nominal sum of cash every month.
The problem is, he stopped being useful after 6 months and could not contribute in every board meeting as time goes by. He has passed the cliff and by the time he was dismissed he managed to walk away with a piece of the business.
The same goes for a CRM expert whom the company hired as a marketing/CRM board advisor — he stopped being useful after 6 months as the company eventually hired a competent in-house CRM head to run the division.
Both advisors walked away with disproportionate amount of equity (even 0.3%) compared to domain expert employees who actually worked their ass off for the firm.
What we have learned was:
- Do not pay equity for domain expertise such as CRM, Product or market expertise such as rentals or international markets. Pay cash instead.
- Award equity to advisors who help shape the vision of the startup and advice on strategic direction of the business. There are true valuable advisors who needs to be motivated long term.
- Extend the cliff to 1 year if possible. 6 months are usually too short and if an advisor is really committed to the long term success of the business, he wouldn’t demand equity in the first few months anyway
You always want to learn from those two-step ahead of you. Advisors are key to avoiding mistakes and act as nice sounding board for new ideas. Build your own panel of advisors at 9steer.co