I had a conversation with an entrepreneur recently and he was trying to parse investor, advisors, when one can become the other, and how to manage it all.

I sent him the following input via email. This is my opinion for sure but thought worth sharing broadly and he agreed.

Investors:

You receive money and give up rights – ownership, control, decision making. Each dollar has a “cost” to the entrepreneur. The goal is to balance amounts and expectations with what you give up by taking external capital. A true “cost of capital”

Investors can be helpful, provide advice/guidance, etc. but rarely perform operational tasks assigned by the CEO. At the Board level this can formalize a bit more with specific asks/requests by the CEO of certain board members.

Advisors:

Uncompensated ones are fans but should not be expected to perform operational tasks. Compensated advisors should have operational accountability of some sort – that aligns with the CEOs current priorities. If equity compensation, they should vest like the rest of the employees (4yrs, 1 yr cliff) or 2 years in some cases for a very high value advisor. The vesting allows you to not incur unnecessary cost/dilution should it not work out and the value exchange happens over time.

If you feel you need to fill operational gaps with compensated advisors then consider your budget (equity or cash) and treat it like a hiring process. If there is a match between offered skills and operational needs then you can make the “hiring decision.”

Can someone be both?

Yes, an advisor can become an investor and an investor can become an advisor.

If the investor is doing more than being supportive and helpful and has a unique skill set that fills an operational need, then structure a separate and defined advisor role.

If the advisor wants to invest, then treat that process like all fundraising respecting minimums and adhering to current fundraising terms.

Should they be linked in some way?

A current advisor wants to invest

Generally a good thing as long as the CEO has not made the continued advisory role dependent on the investment.

Someone will only invest if you compensate them as an advisor. 

Generally no, unless they have a skill that maps to a current operational need/gap as defined by the CEO. In other words, they should be asked vs. this being a condition of investment.

A current advisor will only invest if you increase or extend the current advisor agreement. 

No. In this case the advisory role is now linked to the funding event and is a condition of investment.

Bottom line – treat them as separate and combine them intentionally and at the CEOs discretion.