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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. ✅

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

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.

✅ 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.

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.

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.

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!

The key question here:

✅ What is the time dedication they will be putting into this? You need to specifically land on a number of hours per time period - 5 hours a week, 2 hours a month, 15 hours a week, etc.

Additionally, does the compensation of the potential partner make sense for the time dedication they are putting to this? ✅

I once had an experience where I was trying sell my FinTech company, so I spoke to one of my late father’s contacts in the bond market space. This person was well connected to potential acquirers, specifically one particular tech platform that could potentially acquire my FinTech startup.

On our call, this contact suggested a finder’s fee as a percentage of the exit value in order to help make some connections. I didn’t love the idea, but in some ways it made sense as this person at CEO access at several potential acquirers whereas I didn’t. But this person wanted to monetize the several hours that they spent on this. I had no leverage, so felt like I needed to take it because I was desperate.

The time dedication was probably about a few hours at the most - crafting an email that he likely copied and pasted to different tech CEOs in the market. But, none of these contacts responded. This person walked away without anything lost and I was left with a $650 legal bill from my counsel to review the finder’s fee agreement.

Time spent is a gut check measure of dedication. It is a signal to how much this person cares about the startup, their mission, and what the startup is doing. Or, whether or not the potential partner just seeing this relationship as a transaction?

Be crystal clear on what value output this potential partner will bring. Many people overpromise and underdeliver. Sometimes they don’t mean to. But sometimes they think they can add more value than it turns out they actually can when they get into it.

In the early stages, startups need two main types of results - product output and customer output.

Will this potential partner build or help build my product? Will this potential partner bring on customers?

Many potential partners are utility players - they could do business development, they could help make some potential acquirer connections, they could do marketing.

Just like the time aspect, be very specific with the value they bring. Then ask - is this what my company needs?

Tie the value to a number.

Now, potential partners that bring knowledge or information to help strategy is of some help. Potential partners that bring tangible results that can progress the company trajectory is equally as important.

In my FinTech company, I inadvertently only had advisors that helped me think better, but I should have also had others that brought me product or customer output.

With the three parts of the Potential Parter Expression, what type of compensation? For how much time, for what kind of value, you can do some gut checking:

✅ Does it make sense to give _(compensation)__ to this person who will spend __(hours/time period)___ who will give me the output of ___(value)___? ✅

Founders should be very cautious of people who want compensation in exchange for simply making connections. Here’s why.

I firmly believe that a network should not have a paywall, at least on a percentage or per connection basis.

Tundra Angels has invested in 19 companies. We own equity in each one, or convertible notes or SAFEs that will convert to exit. We have a very strong incentive to the exit, the liquidity event, when we realize the financial gain from that equity.

Furthermore, we actively try to help our portfolio companies raise capital. I’ve made investor introductions that have resulted in hundreds of thousands if not over a million dollars being raised across our portfolio in aggregate. When this happens, we don’t get anything more than the equity gained from our initial investment. We are investors in the company incentivized for the long-term. We want it to succeed. That's what we do.

Additionally, investors tend to look unfavorably at a founder that engages with a third party to help them make investor connections. The logic follows that if this founder needs to engage someone to help the CEO make investor connections, especially at the pre-seed to Series A stage, then it indicates that founder doesn’t have the chops to execute a fundraise. I’ve never knowingly been on other side of a deal where the founder was introduced to me via a finder. When I have encountered such deals, I’m always suspicious why the CEO couldn’t hustle their way to connect with me himself or herself.

With potential partners, there needs to be a dating period of a solid period of time before marriage even makes sense.

If you’re looking to engage a potential partner, then I recommend establishing a block of time, minimum two-three months, with specified value output to determine the collaboration fit.

For this time period, founders may ask if there is any compensation for this “dating” period. I think it depends on compensation, the time dedication on the time frame, and the value output.

If you can, I would highly recommend not having anything on paper in the immediate term so that you can just do work and see if the magic happens. I’ve seen a handful of examples where potential partners jump right in and start helping and adding value without anything signed or strings attached. It shows that they have a passion behind what the company is doing. In my experience, that behavior shows that this person is of a high quality. By the way, this scenario tends to be the case for individuals and not as much for consultancies.

The advantage of just starting to work together and not agreeing on paper too quickly is that you don’t know how this person will fit with you. Plus, you may spend six weeks negotiating the contract/agreement only to discover that after two weeks, you can’t stand the person and you just wasted six weeks of time.

The lowest risk move for both the startup and potential partner is to just start working together casually. You’ll both find out pretty quickly what you want the next steps to be.

There is no perfect amount, no perfect situation, no perfect partner.

But once a startup has driven into the ditch, especially related to a potential partner, and where there is significant long-term equity on the line, it’s very costly to get a tow truck.

The framework of the “Potential Partner Expression” - What type of compensation? For how much time? For what kind of value, and starting small, should arm you as you consider potential partners for your startup.

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