Should I offer cash or stock to a startup advisor? Cash where possible, and equity only if absolutely necessary.
As a general principle, offer cash/commission to people who help you close a one-time deal (such as recruiting a round) and only offer advisory power to people you know will be ongoing advisors to the company, and even then , only if you can’t pay them on a commission, project fee, or commission basis.
But I can’t afford it!
Short on money? Of course you are. But remember: in the beginning it was easier to earn more money to put into your startup than to raise capital for it at a higher valuation.
Provide short-term incentives for short-term assistance and long-term incentives for ongoing assistance or you will create misaligned incentives.
Cash is a short-term incentive – once your advisor has spent it on his boat docking costs, it’s no longer an incentive. Equity is a long-term incentive – worth next to nothing now and hopefully worth a lot more in the future.
The barnacle on your pet table
You don’t want someone at your head table who isn’t aligned with you in building the company’s long-term value.
Someone who actually would have preferred cash and who instead holds stock for something they’ve done for you in the past is less likely to contribute to the company. Even worse, they are a burden that you cannot easily shake off.
Until you (or a prospective investor) buy out their shares, they will act like barnacles on the rump of your company – always slowing your progress, adding no value, adding friction to future capital increases, shareholder meetings and majority decisions. They want to lose their money and will not be satisfied until they get it.
The longer they don’t stay out of your startup, the more you and they will differ in your perception of the value of the work they’ve done to earn those shares.
They will think, “Damn it, why did I do that work even years ago for that startup? They were nothing but a pain in the ass. And they would be nothing without the help I gave them. But what did I get for it? Nothing!”
And you’ll think, “Why are they such a nuisance? I avoid talking to them as much as possible because if I could turn back the clock, (a) I would have chosen someone else to do it, (b) it was in no way worth what I paid for it; and (c) if I had 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 – why should they be the first to get their money out of it?”.
It rarely ends well.