Ethics Coach

Are Paid Referrals Worth the Cost?

Are Paid Referrals Worth the Cost?
Image credit: Andy Martin
This story appears in the March 2015 issue of Entrepreneur. Subscribe »
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Q: I’ve been approached by people who want me to pay them to introduce big-name clients to my business, and by others who want to advise my business in exchange for a percentage of the company. Are these arrangements ethical?

A: It sounds like you have opportunists at your gate—but that doesn’t mean you should dismiss them all straightaway. Reduce the likelihood of walking onto shaky ethical ground by making decisions based on transparency, integrity and accountability. Take time to think through the benefits, drawbacks, implications and potential for unintended consequences in paying money for client referrals or handing over a percentage of your firm as payment for advice. Due diligence on potential business partners or suppliers should always include assessing whether they are likely to be an asset in your efforts to build your company’s reputation and trust with stakeholders. 

Regarding referral fees for introductions, research the integrity of the person who approached you, and find out if paid introductions are an accepted practice in your industry or if they’re considered dodgy and will undermine your firm’s reputation. If you decide to move ahead, be upfront with prospective clients about the arrangement—it is unethical not to tell them. Then quickly move to fill them in on why your company is uniquely suited to exceed their expectations. 

As for sharing equity for advice, I asked Alex Glovsky, a partner at Boston-based law firm Nutter McClennen & Fish, what he thought of the practice. Glovsky, who counsels entrepreneurs on matters related to corporate governance and equity structures, says that while there is the potential for conflicts of interest in certain contexts—for example, when trying to sell a business—there’s not as much cause for concern for strategic planning advice. But an advisor seeking equity should be able to give advice that is growth-related and provides significant and specific enterprise value.

“While paying in equity might save you cash now, understand what it means over the long haul,” Glovsky says. “The advisor is getting a piece of your business, which could prove very expensive upon an exit, so the advice provided needs to be extremely valuable
to the company.” 

Still want to trade equity for advice? Glovsky suggests talking to your legal advisor about structuring the agreement so that you maintain some measure of control over the equity and that any equity granted vests over time based upon the specific business objectives
of the relationship. Glovsky’s recommendation to seek legal counsel goes double if the advisor is going to help you with any financing issues, as there are regulatory constraints on paying those kinds of advisors, whether in equity or cash.

Q: If I focus on compliance at my company, won’t the ethical issues handle themselves? 

A: Building trust with your stakeholders requires a focus on both compliance and ethics—but one doesn’t automatically take care of the other. Being in compliance isn’t negotiable, and the rules are (usually) clear; if violated, your business could face fines and penalties, negative media attention and unnecessary legal problems. However, as important as it is to follow rules and regulations, they’re not catalysts for success. Leaders and teams who focus attention on ethical behavior can have an impact on how employees and other stakeholders feel about the company. Many successful businesses started small, with an equal focus on their products, company values and employee satisfaction (think Hewlett-Packard Co., The Container Store, Ben & Jerry’s, Nordstrom, Starbucks). 

A culture of compliance will likely keep a business out of trouble, but a company with a culture that demonstrates daily why its values, people and customers matter? That business is poised to flourish.

Edition: November 2016

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