How Much Equity Should You Give Advisors?
A little over two years ago, Jim, a well known entrepreneur, began singing my praises all over social media. He didn’t have to do what he was doing. I thought it would be nice to say thanks.
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So I reached out to Jim, and we arranged a time to talk.
We had a really fun discussion about startups and venture capital. It turned out that we knew many of the same people, and we had a very similar view of investors.
Near the end of our conversation I said, “You’ve done so much for me, what can I do for you?”
“How would you like to be on our board of advisors?” Jim asked me. “I think it would be great to bounce ideas off you.”
It was the last thing I expected Jim to ask me. I loved what his company was doing, so it took me about one second to say, “That would be great!”
The equity allocation for advisors is well known.
There’s a pretty well known range for paying advisors. Let me walk you through it:
- If you’re bringing on an advisor for their name value and nothing more (something I would not recommend doing), then the equity range is likely between 0.25% and 0.5%.
- If you’re bringing on someone to truly advise the company, then, depending upon the stage of the company, the equity range is between 0.5% and 1%.
I’ve advised several startups, and the equity I’ve received has always been between 0.5% and 1%. And, unlike employee stock options, your advisor stock options start vesting immediately instead of having a one year cliff. The reason for the difference is equity is the only compensation you’ll get as an advisor.
The equity discussion for being on an advisory board is pretty straightforward.
I can’t remember, but I think Jim said to me, “How about 0.5%?”
“Sold,” I replied. 0.5% Felt like the right amount based upon where Jim’s company was at.
That was it. And, that’s all you need to do too. If Jim hadn’t brought up the equity, then I would have.
An advisory board is not going to help you raise funding.
One of the big mistakes I see many entrepreneurs make is adding their advisory board to the team slide in their pitch deck. The reason it’s a mistake is savvy investors know that most advisors don’t contribute much to a startup.
It’s the management team, and the team you build that is going to determine your success. So, hyping your advisory board, unless you have someone really well known like Elon Musk on it, isn’t going to help you. In fact it could hurt you.
So, only add advisors that you truly believe are going to help you grow your startup.
“We’ve let all of advisors go, except for you,” Jim said to me during our last call.
I didn’t have to ask Jim why he’d taken that action because I had a pretty good idea.
There’s only so much equity you can give. If you allocate too much equity to a board advisors, then you don’t have enough equity to give your team. So, you really want to make sure that any advisor you bring on is going to add value.