Advisors – how much equity is right?

In many cases, young startup companies will benefit from the advice of more experienced (not necessarily older) people that have been there/done that. Often times this experienced person will help out a young company because they are fond of the founders as well as the startups vision and product.

I’ve seen many such people help out young companies without any economic compensation whatsoever. They just love it. That’s the motivation behind the mentors as TechStars.

There are times when founders will want more of the advisors time, brains, energy & commetment. And as such, it may become quite appropriate to give that person equity. Essentially, if that person is going to give real value to the company then it makes sense to give them value in return.

The question becomes how much to give.

Here are a few recommendations:

1 – create a small pool of options that are just for advisors upfront. Keep it fixed. It will help you prioritize which advsors you want to bring on board.

2 – unlike employees, advisors may not be helpful as time goes on. They may become distracted with other things on their plate. that’s the most common thing. with employees, options typically vest over multiple years. It’s hard to use that type of vesting schedule with advisor but I would at least think about it in those terms. For example if you are willing to give an advisor .5% of your company and they will only commit to helping for a year then that is like giving an employee a 2% grant over a 4 year vesting schedule. Is that advisor worth as much as a senior employee getting a 2% grant?

3 – VCs invest cash for their equity. I often will suggest that advisors also invest a fractional amount which does 2 things. It qualifies their commitment and interest. It also it allows them to own more of the company than a straight option grant.

4 – Make sure you ask for other founder references! Ask other founders if that advisor was helpful. What did they do for the company? Did they make important introductions? Help with key hires? maybe fund raising help? Product feedback/insight?

Frankly we have had a mixed bag when it comes to advisors in our portfolio. In some cases it didn’t meet expectations. I think it was simply a matter of expectations and miscommunication upfront.

But when everyone is on the same page upfront and the founders & advisors click, it can be incredible.