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Tundra Angels was once doing due diligence on a startup.

As part of the process, we reviewed the startup’s cap table. I didn’t recognize one particular name, as the name had never come up in conversations with the CEO. But, this person owned around 15% of the company.

I asked the founder and CEO about who this person was.

Startup CEO: “This is the person that I originally co-founded the company with. It turned out that we didn’t mesh and collaborate well.” 

Me: “Is this person still active in the company?” 

CEO: “No, they are not.” 

And yet, this person owned 15% of the company.

I wish this was a unique case. But it’s way more common that founders think.

✅ The biggest mistake I’ve seen founders make with potential partners is that they jump in way too early, and/or they give away too much, too early. ✅

My Rule of Thumb:

For each potential partner, founders should be super clear on what I call the “Potential Partner Expression.” Here is “Potential Partner Expression:”

Definition of Terms

In this article, I will use the word “potential partner” to refer to a potential co-founder, advisor, consultant, etc.

A potential partner is a relationship where there may be short term cash incentives, or long-term equity, (or both) at play for the connections, coaching, advice, or output.

I want to make clear that by saying potential partner, I’m not referring to an investor. An investor is different. An investor invests capital for equity, nothing more. It is a clear value exchange with no short-term cash strings attached. The investor gives connections, coaching and advice because the investor owns long-term equity in the company.

That’s how Tundra Angels works. That’s how nearly all VCs roll.

Importantly, in this article, I am referring to how to consider the financial incentives of potential partners, not investors.  

Let’s dive in.

What Type of Compensation?

✅ There are two main financial compensation of potential partners - 1) Cash in the short-term or 2) Equity in the long-term. ✅

Both are neutral by themselves. It’s rather the context of the potential partner and of the company itself that determines which one is best.

Founders need to ask the potential partner, “What does a financial win here look like for you?” However, in addition to asking them, you also need to observe how they talk. Notice the phrases that they use. Observe their behavior.

Cash in the Short-Term

The potential partner might directly say that their fees are $XXX a month, or over some time period. You then understand that they have a short-term cash incentive.

They may also speak about cash tied to percentages of a milestone, e.g. % of money they help you raise, % of commercial deals or sales, or a kicker if they make a connection to help sell the company. This also means that they have a short-term cash incentive.

Or, it might be a permutation of both of these.

If the potential partner says phrases such as above, then you are likely dealing with their “pay the bills” money. They are a person or firm whose livelihood is tied to this type of work. Again, this fact by itself is neutral. It’s rather the context of the potential partner and of the company itself that determines which one is best.

Equity in the Long-Term

If they want to invest in the company, and want no short term cash, then they are an investor and that’s separate.

A potential partner may want to invest, and also set up another commercial arrangement. Or, they may want to be an advisor and receive advisor shares. Or it may be a co-founder and they are in a financially secure place where they only want equity.

Remember and Recommendation:

Early stage startups tend to have more equity than they do cash. Yet, that doesn’t mean they should be casual about giving away equity.

Relationships that only include short-term cash are relatively easy to break away from.

Relationships that includes long-term equity are very hard to break away from. 

Some potential partners that express the desire for both. In the early stages of the potential partner relationship, I would steer that person to one or the other, not both, in the short term. (See Start Small section at the end.)

Also, for any long-term equity piece, make sure it has a vesting schedule in the agreement!