The Downside of Advisory Capital: The "No Assholes" Rule Has Holes In It

I am preparing a presentation on advisory capital for the upcoming SVASE Startup-U event, and was laying out the basic premises of the whole business model. I looked over my outline, and realized that I was painting an altogether too rosy picture. Considering that I had just gone through a messy breakup with one of my advisory clients, I decided that to temper the upside I would have to expose some of the downside.

As an advisory capitalist, I have a very small minority stake in any business I am working with, and as such, functionally zero control of the business: basically nothing aside from my persuasiveness. If a disconnect occurs between the management team in a client company and me -- for example, if my recommendations run counter to what the team wants to hear, or if I suggest that a planned course of action is not best for the company -- the climate can rapidly grow icy.

Unlike a VC, who may have all sorts of levers to pull when a management team goes rogue, I am in a position much like a minority-stake founder. And, just like a founder that falls out of grace, I may be ignored, or worse, by my erstwhile partners.

In a recent situation, a company that I had been working with for the better part of a year hired a new head of marketing, without my involvement, despite the fact that I was supposedly the head of their advisory board: and he was a guy with functionally zero experience in the market the company is trying to enter. When I asked why he was hired, I was told "he understands us." Not "he understands what we are trying to do," not "he has deep experience," or any of the sensible reasons for hiring someone.

Relatively quickly, the business plan was veering away from a Web 2.0 consumer play into some complex and constantly shifting combination of technology licensing, consumer play, and enterprise sales. I suggested that trying to do everything at once was a recipe for disaster, and that the company had no DNA in direct sales of whatever sort. Next thing you know, I am uninvited to a two day planning session two days before it was to take place. Then, a few days later, I was informed that management had decided to dramatically and unilaterally change our contract, which was designed for a minimum of a year, and a minimum number of days per quarter. I was told that they reserved the right to modify the contract at will, since it was not specifically ruled out in the agreement. Note that they never suggested such a thing at the time of the contract signing, and if they had, I would have explicitly rejected it.

So, I fired the company. I would not accept the modifications they proposed to the terms we had agreed to. Since I had already worked for close to six months at a discounted consulting rate based on our agreement on a long-term, retainer-based contract, this is an example of a management team simply trying to take advantage of the relationship.

It's quite common that companies try what amounts to a similar finesse with short-term consulting contracts, which is why I devised the advisory capital model in the first place. They want to hire me (or others like me) for a short-term engagement at the minimum price they can negotiate, with no on-going commitment, and no stock. In that engagement they seek to exploit the advisor to the maximum, gaining feedback on their business plan, go-to-market advice, access to contacts, whatever. Basically, they beat you like a rented mule. I am willing to undertake such tactical engagements, but I only do so at my fully-loaded, fat cat consulting rate.

Basically, I don't begrudge companies for trying to exploit me, but I have decided in general not to be a whore any longer, selling it by the hour. Or, if I do, I am a very expensive whore. I am too old and cagey.

But when people have made a commitment to the advisory capital terms in a contract, and then simply drop those agreements, I have little recourse but to fire them. After all, once rule #1 is broken -- the "No Assholes" rule -- then there is no hope. People can learn to moderate their behavior, but never their basic psychological makeup. Once they start fucking you over, there is no end, because if they rationalize doing it once they will always be able to go through the same thinking process again and again.

In principle, I could sue such companies for breach of contract and maybe even damages, but I think in general that is fruitless: a waste of time and money. That just leads to lawyers making money. In this and similar cases -- happily few -- I simply ostracize such companies and warn off my friends and contacts, so that no one else will get their fingers pinched.

The downside of this particular episode, this cautionary tale, is that I will have to add a termination clause to my agreements in the future, to better guard against this. Basically filling the holes in the "No Assholes" rule. What I plan to stipulate is that if the contract is terminated for any reason other than cause (and cause will be limited to felonies, or other really unambiguously bad acts, like breaking an NDA) then the one year stock grant will be accelerated, and whatever discount has been granted will be rescinded for all time expended since the outset of the contract. In this recent example, that would have cost the company around $10,000. This sort of penalty is not a fortune, but enough to take the sting out for me, while leaving a willful client a way out of the deal for a price.

The good news is that the great majority of advisory clients I have worked with in the past two or three years have worked out very well. But there is always a small minority -- maybe one in twenty -- that slip past my bullshit filter, and the relationship goes sideways. That's one of the reasons I reject so many (at least 50%) at the outset, right after the initial one or two day consulting gig. When I have that strange, "this feels wrong" sense, I simply don't follow up with a proposal for a long-term agreement, or, if pressed, I suggest a baseline price that the company won't want to pay.

There are other downsides to advisory capital, but this is the largest one, and one that a more complex and ironclad contract might solve. Once I develop such an instrument -- along with other documents and materials -- I intend to package the whole thing up with a one day event, an Advisory Capital Summit, and take it out on the road. More to follow on that front.

tags: advisory+capital, svase+startup+u, the+no+assholes+rule, advisory+capital+summit

Comments

[amette]

How about publishing your basic contract to help other consultants avoid such problems?

[Darren McLaughlin]

Great sentiments, and one that's true in almost any walk of life. And one thing about whores, the smart ones raise their rate so they 1) see less clients and 2) Earn less money.

There's a lesson in there somewhere. Thanks for the excellent post.

[Dennis Howlett]

Good for you Stowe - I've fired clients for excluding my Gmail address or refusing to accept email from Writely. It's downright f***ing stupid. And a company that's stupid at that level isn't going to understand much of what I have ot say anyway.

[Pete Cashmore]

Stowe,

Yeah, this is a really interesting model. Like the first poster, I'd be interested to know what the contract looks like for these arrangements.

[Ben Metcalfe]

Yes, I've had a similar experience with a company who wanted to use my contact network to poach people to boost it's staff-base and then leave me high-and-dry.

I'd be really interested in seeing either your contact or at least the get-out terms you've used.

I'm also wondering whether there is an opportunity for people working in such an advisory capacity to disclose other experiences, exchange advice, etc in a closed and protected environment? (Forum, email list, etc?).

I'm not sure whether this is what the Advisory Capital Network is going to be or if it's more a trading brand for you, Richard and Umair?

[Mark Scrimshire]

Stowe, I'm with you on rule one.

A more robust contract will not necessarily save you from the problems you are trying to address.

However, I believe a more robust contract will afford you more opportunity for your potential partners to demonstrate their true colors and give you an early warning that they won't be able to save themselves from violating your first rule.

It is the PROCESS of reaching contractual agreement that becomes your major safeguard from entering in to a contract with someone that breaks your first rule.

Then all you need is an attorney to help you draft that cast iron contract - An attorney that doesn't violate your first rule...

[Lisa Padilla]

Now, that's a sharp headline.

[ZF]

I don't want to be unfriendly, but I can't help seeing that there's another side to this.

I'd bet that a whole lot of VC's are having a good laugh this morning at the idea of a startup strategy advisor who can't even think far enough ahead to write a contract for himself that doesn't have a hole in it the size of a barn door.

[David G]

It takes two to tango - I don't know the other side of this story but your attitude towards this client comes across very paternal in this post - especially given the arm's length role an advisor *should* play - any VC who makes the same mistake might get a similarly cold shoulder.

I've done my share of strategic consulting, so I have empathy for you. I've found that you really can lead the horse to water but you're flogging a dead one if you try and make it to drink. Frankly, in your position, you shouldn't ever answer a question your client hasn't asked you about - and then, present them with options and case studies that help then decide. You're an advisor; your clients want your opinion & advice - if they'd wanted your expertise, you'd have been recruited.