Should I pay my lawyer or advisor in stock?

I had 3 founders who had questions about compensation in Indian startups last week. One founder is building a mobile application for social TV, another a SaaS marketing application and the third a retail loyalty program using mobile phones.

They had multiple variants to the same question:

1. One was trying to figure out what percentage of stock to give an “active” advisor who was promising connections and a deal with a top customer.

2. Another was trying to see if she should pay for legal fees with stock (this is a US entrepreneur). Indian lawyers rarely accept stock as payment.

3. The third had a MySQL consultant who wanted to be paid only in cash.
Startup Compensation FrameworkTo address these questions and more I am sharing a “compensation framework”, that I have used consistently for figuring out “how do I pay” for startups.

On the x-axis I put part-time and full time commitment. On the y-axis I put the payment methods – stock and cash.

For most parts, before getting funded, founders of the company get “paid” only in stock. So if your company is not making money or is making “not sufficient” money to pay the founders full salaries, then stock is the only compensation for founders. Usually most founders will get their stock vested over 4 years, or they may own  the company outright. On funding (institutional or seed), most founders still tend to take a small amount of money (not full opportunity cost salary) since their motivation should be to grow the company and use the investment towards growing the company’s value instead of growing their own bank accounts.

Full time employees get paid mostly in cash (and some stock). The Silicon Valley model is to pay 20-25% less than market rate for key full time hires, and “make them whole” with stock options which will have more value than current cash, if there was an exit in 2-5 years. Most Indian employees however do not like stock options and view them as “gravy”. I agree with their view for most parts, since exits are far and few between in Indian startups. Since key engineers, marketing professionals in India expect full pay or close-to-full-pay (some actually expect a pay hike with a startup because of the perceived risk), I am of the opinion that you dont give everyone stock options until you have proven that the company has market momentum. You can always accelerate their vesting pro-rata based on their tenure with the company when you believe there’s a strong potential for an exit for the company (i.e after 2-3 years).

Consultants of every kind (sales, lawyers, accountants, UI experts, marketing consultants) who work part-time should get paid only in cash is my perspective. They dont add long term value to any startup and while they are valuable in the short-to-medium term, their commitments are rarely with the startup alone. If you cant afford to pay the consultant market rate, I would offer the deferred compensation, or “true up” compensation on growth, but not stock.

Finally advisors and mentors, should only be paid in stock. How much equity you pay the advisor in a startup depends on a) the quality and market-worthiness of the advisors b) the amount of time they spend with the company and c) the expected objective you get them on board as advisors. E.g. If you are getting a mentor to open doors to potential customers, they would be given stock corresponding to the type and number of doors they open for your or the number of customers you close because of their help. Usually advisory positions are awarded stock vesting over a 18 or 24 month period (tenure of their position with the company). I know most entrepreneurs in India use US metrics (0.25-1% of stock in the seed stage, less in follow on stages) for percentage of stock to give advisors, but that’s not going to get you quality advisors in India. Since exits are fairly rare, you have to double the US (Valley) advisor stock options percentages and motivate good, high quality advisors to help you get achieve your goals.

Love to hear if you guys think differently.

P.S. Friend and investor Rohit has some datapoints around active angel investors data points.

 

Advisor stock compensation

 

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13 thoughts on “Should I pay my lawyer or advisor in stock?”

  1. I disagree that Indian employees and consultants should be paid in cash. Doing this validates the fact that they’re only working for purely money and has no passion for your start-up. I would prefer less-than-perfect people who believe in your dream and are ready to take stock-options as part of their pay. Someone has to start this in India. Why not you as a founder be the first-mover here?

    If can’t sell them on your start-up idea/product and be sure about it, you need to question your spend on their salary!? If they don’t buy into your start-up idea or product, they should not be working for you either. Either way, they must be taking a part of salary in stock and working for less or not working for you at all.

    1. Keeping stock-options as part of the package acts as a filter and attract right kind of people for your start-up. Start-up should not be hiring someone who considers stocks as ‘gravy’. They must be left to suffer in their cubicles.

      1. Rajan, I understand the sentiment, and I would also share with you that its the HARDEST part of being an entrepreneur in India. Finding people who are willing to take the risk. Most employees at just that – “employees”. They dont want to take risk and I dont agree with their sentiment, but I understand their point. Try to hire people coming to a startup who are attracted because of your “passion”. If you find them most likely they want to be a co founder themselves.

    2. Great sentiment, but my post is based on reality of hiring for 4 startups and over 150+ people. I dont get people interested in taking risks. They are smart, intelligent, passionate, but risk-averse.

      1. Mukund, I see that you are a realist. As an entrepreneur i like to question the status-quo and try to change things. Even if it doesn’t actually help getting the new joinee motivated, it is like an acid test to evaluate people who actually are passionate about your start-up and can see it work. I developed Hireplug with a team of 3 and offered my team members 1% equity each as part of the package. They stuck around for over 2 years with Hireplug and did our best to make it work.

        We had 10 paying customers and recruiters from over 300 companies using the product. We had to close it down because of the slow growth and frequent changes to Facebook platform and our heavy reliance on the platform to attract talent.

        I still believe it is possible to attract people who believes in you/idea by the way of assigning equity as part of the package. Need to offer something serious like 1% of the company vested over 3-5 years. They can clearly see the possibilities in that case.

  2. Great post, and a nice framework for entrepreneurs to think through the subject. One thing, Indian company law does not allow stock vesting, however, stock options with vesting period is allowed.

  3. Great, but I would think differently about the full-time employees bit. What you say is true for most employees, but your key employees must truly believe in the potential and the ability of the team, to get everyone a good exit. If the key employees are also here only for money, they will also leave for money, and for a startup, matching the next offer will be possible. If someone has gone rafting, to be a part of the excitement, you want to board when there are rapids. People who do not want to join in the startup stage, are like those who want to board the raft when the water has hit the plains, there is no turbulence. People who want to be paid the full market rate to boad the raft, are not there for the thrill or learning and they will want to get off very soon, the moment the turbulence scares them.

    Cheers

  4. Despite equity being seen as the ‘right’ reward, my experience has been that the startups i know in india had a very hard time (compared to silicon valley) attracting people to the mission+equity at 25% or more cut from market salary. In the valley, it is common to see early core employees work at 50% of market even. If you can get the *right* employee in india for mostly equity – great but be prepared to fish with cash. This is not inherently an attribute of us Indians – I dont think India has seen many (any?) virtuous venture cycles where an independent founder raises seed or bootstraps, then raises A/B/C/.. grows + returns money to common + preferred in a profitable and large exit. Once several of these cycles complete, there would be ‘existence proof’ of common equity == much higher value than cash.

    Also, “quality” advisors are rare in India at this point – there are several that promise “intros” to VCs or customers. Carefully evaluate their resume + past successes + references *before* you sign up any advisors. If they claim they connected XYZ company to potential customers, call them and confirm – not just the top level details but some working level truth to the claim.

    If you find the right person for your startup – sign them up and just like signing up early stage core employees, do not optimize for lower-dilution – offer what you have to. A thinner slice of a bigger pie goes the thinking vs. hoarding a whole lotta equity for nothing.

    Carefully consider the ‘term’ of the relationship. Does the advisor want the equity to vest immediately? Or over 1 year? or over 2/3 years? In the valley, common to have 1 year terms and equity vests monthly. Remember it would be hard (impossible?) for you to gracefully fire your advisor in the event things are not what they were promised to be. So 1 year terms may be best.

    And just like hiring a key employee, try before you buy – spend as much time as possible *prior* to committing to figure out if this is someone who will be genuinely helpful. Establish some bounds – # of hours per week/month + get in to detail of the promised “intro”. i.e. will it be an email ? a phone number? an in-person meeting with advisor present? if things dont move forward (to a POC/trial/contract) with the customer in question, would the advisor try and open alternative channels for you? How well do they know their contacts – do they just know them (socially – weak for business) or did they work together (strong / trusted axis) or did business together (separate companies – may or may not be strong). The more specifics you can get out of them, the more ‘data’ you will have to back up your instincts.

    No lawyer I know in India (From Amarchand to local firms) has taken equity as compensation. Vague claims of “not being allowed” by firm etc abound. Not sure where the truth lies. If you succeed in getting good legal work for equity – let me know ! In the valley, good lawyers will often defer fees till financing (very common), or give you an implicit discount (vs. hourly billing) and would often offer to invest to get some preferred as well as take some common. All equity goes in to an arms length Partners Fund for most law firms. Individuals are known to work for common just like advisors.

  5. Mukund,
    Great post. Given the significant challenges that could crop up between the founders, “outright” vesting at the start is something I do not recommend.. This gets the guys who part ways an undue advantage.
    Always prefer vesting optio over a period. Unfortunately the company laws in india don’t permit some of these structuring between the founders!

  6. @Mukund,
    from last few days i was searching for some info on same matter, & me & my co-founder were in the Black Hole but finally got the answer.
    The metrics are really good to define What to give & take ..

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