Compensation when Entrepreneurs and Advisors Part Ways

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Entrepreneurs often rely on consultants and advisors to contribute time and resources to assist them in commercializing their creation, invention or development.  There is hope and excitement when people start working together. In addition, many entrepreneurs lack business acumen and look to the advisor for this skillset.  Often there is some vague offer of compensation of shares with no agreement in writing as to exactly how many and when the shares will be issued, or shares may be issued with no understanding as to what the advisor/consultant is or can do to add value to the business, including milestones or other target achievements, as consideration for the shares. If there is a parting of the way between the entrepreneur and advisor prior to the business having much or any commercial value, advisors and entrepreneurs often approach the matter of compensation differently.

If there was no specific agreement on the work the consultant was expected to do for the start-up, or how the consultant/advisor would be paid, consultants/advisors will generally approach compensation by estimating the number of hours they spent on the business and multiplying it by an hourly rate, or some rendition of that.  After all, this is the default method of valuation on the basis that consultants are paid for their time.

This approach was probably never discussed or agreed with the business owner and can come as a shock to the entrepreneur, who didn’t realize that every hour and conversation was being tallied by the advisor/consultant as a debt for later payment.

The entrepreneur’s approach is usually one based on the principle of working together and sharing the risk where if we succeed we all win, and if we don’t, then we walk away.  For entrepreneurs, shares are given sometimes in advance and otherwise in expectation of or payment for results, for financial contribution, negotiating business deals, opening doors and introducing helpful contacts, substantial promotion of the business, attendance and contribution at meetings, presentations, strategic and other advice and support for the business.  If no objectives have been agreed and the parties part ways prior to revenue being generated, the business showing a profit or a “liquidity event”, the entrepreneur will generally approach the situation from the following standpoint: what is the value of the contribution to the business, or the value of the business based on the contribution.  Efforts and time are largely irrelevant to an entrepreneur. From an entrepreneur’s perspective, where there are no or few tangible results from the effort of the advisor, there has been little or no contribution.  Zero results at the end of the day equals zero regardless of the hours spent.

The parties may be unaware that their expectations differed or, as lawyers say, there was no meeting of the minds or agreement from the start, and that each person is approaching the issue from his or her perspective. There are often other items or behaviour between the parties that result in an escalation of the misunderstanding, and complicate the matter.

A lawyer will always recommend that an agreement be made at the beginning.  However, that is cold comfort for those who did not make that bargain or find themselves in this situation.  If that is your case, consider viewing the situation with this information and developing a compromise or agreement from there.  Notwithstanding that you might be “right” (at least in your own mind) do you wish to engage in a dispute or use your precious energy for more life enhancing endeavours?

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