No Money For Advisors? Pay Them In Equity Instead

2022-10-17 original Startups

In the early stage of a startup, almost everything is missing. So think about how to make maximum use of the few things you do have.

The simplest approach here is to use equity.

In other words, you ask for cooperation in exchange for shares. There are a few techniques for seasoning this, and I think they’re worth using.

<Actually, have them put in money instead>

Advisors often share characteristics with the angel investors described in another section. Some have substantial assets even without being active as investors; others have already been through the whole cycle once. For people like that, proposing “why don’t you put in money instead” is a valid option. But in that case you’ll be giving them a certain amount of shares, so naturally they need to be someone you’d want advice from at the level of management itself. I sometimes see this pattern applied when someone just wants a bit of help from a licensed professional, and personally I don’t think that’s a great fit. Licensed professionals are specialists in a narrow field, and there’s a clear gap between them and officers who are expected to look at the business as a whole and commit to the numbers. Of course, this doesn’t apply to someone who can offer enough value to bridge that gap.

An SO is a stock acquisition right whose exercise timing is limited. It has no direct effect on voting rights, and I think the fact that “you don’t need to worry about it for a while” also brings some peace of mind. Non-voting shares aren’t bad either, but I think going straight for SOs is more appropriate for an early-stage startup, and no one should complain about it. I used to think stock options were only for employees, but it seems the tax system has been revised, and now it’s apparently possible to give SOs to people outside the company too.

I think it’s fine to hold the view that money should be saved as much as possible for the people, things, and matters that can only be settled with money.

The content of this post is part (original text) of the following book. If you’re interested, please get the book.

The Shape of a Happy IoT Startup

Originally published in Japanese at https://clazytech.com/2022/10/1227/. Translated with LLM assistance and reviewed before publication.