Many business and strategy advisors charge consultancy fees that range from under $2,000 to over $4,000 per day. Before you know it, even a relatively simple project is costing the company tens of thousands of dollars. Worse still, those fees are collected throughout the project, often as a fixed monthly retainer, or invoiced in a lump sum as soon as the project is finished.
If you can even get your head around justifying the total amount, your carefully managed cash balance probably doesn’t cover the bill. Startups and early stage companies are seldom flush with cash – and leaner and better for it, many investors would argue – so high-price strategic advisors are usually dismissed as out of reach.
At Strategic Piece, we’ve worked in the startup and early stage business world for many years and we understand this conundrum well. There’s an urgent need to find hybrid compensation models that allow companies to engage strategy advisors while balancing the risk and upside potential that each side experiences.
We don’t work for free – and you shouldn’t want us to either! To quote financier Sir James Goldsmith, “if you pay peanuts, you get monkeys”.
If we were working for you for free but another company came along that was willing to pay a monthly retainer, guess which project would necessarily take priority for Strategic Piece to responsibly manage its cash flow?
Similarly, if we accepted projects where 100% of our compensation was at-risk, payable only if the project succeeded, we would have to charge a significant risk premium to ensure an acceptable overall revenue stream to Strategic Piece from the projects that turned out to be winners.
Our goal is to find a fee level and structure that best fits your cash flow constraints. This might involve invoicing for actual hours worked or a fixed monthly retainer. And, the fee level can be significantly lower than our book rates if other components are included, such as the success fees and equity compensation described below.
Achieving proper alignment means that your and our risks and opportunities for upside should also be balanced. Our success should be linked to your success.
One of the most straightforward ways of achieving this is a success fee, payable to Strategic Piece whenever you hit the milestone around which the project has been conceived. For larger projects, we might also identify intermediate milestones that trigger partial success fees, depending on the overall scope and the client’s specific situation.
Since Strategic Piece isn’t a licensed stockbroker, we’re not in the business of marketing shares in your company directly to investors. Instead, we help you prepare to market yourself and your company and make introductions to potential investors. Since it positively affects your company’s cash position, a successful fundraise could definitely be one of the criteria to which we link a success fee, depending on how our engagement is structured.
When entrepreneurs and early stage businesses want to hire advisors and critical staff but can’t afford to pay them in cash, it’s always tempting to offer equity Sometimes this is appropriate. Many times, it is not.
Leaders who give out stock compensation too often and without sufficient foresight can end up with a catastrophically complex capitalization table and a long list of long-since-departed individuals to whom information and tax forms must be sent and from whom consent must be obtained before the business can complete certain transactions. Such a mess can be terminally off-putting to an otherwise keen investor.
We generally won’t consider accepting equity compensation unless you’re engaging Strategic Piece as a long-term advisor – for example, fractional strategy advisor, advisory board member, or independent member of your board of directors. An exception might be made if the project is likely to result in a capital raise that would significantly increase the value of stock or options awarded to Strategic Piece as part of its project compensation.
We like to think of compensation packages in terms of a ternary diagram (or a Gibb’s triangle, if you prefer). It graphically depicts the ratios of three components whose values sum to a certain amount – in this case, the total cost of the project.
Each corner represents 100% of a particular component – 100% cash compensation, 100% success fees, or 100% equity compensation.
As shown by the grey shaded area in the diagram below, there are certain combinations that Strategic Piece is unwilling or unlikely to consider because they result in too much compensation risk or are inappropriate for one or both of us, as discussed above.
We’ve marked a few examples on the diagram but these are for illustration purposes only and don’t necessarily represent a compensation combination that Strategic Piece has accepted or will agree to accept in the future.
In putting together each project proposal, our objective is to find the combination of compensation elements that best aligns your and our interests, cash management constraints, risk profiles, and upside potential.