TRC 031: Our handy guide to Advisor Equity for Startup Founders

I have had a lot of questions recently from founders who are being asked for equity from potential advisors.

It can be a minefield.

How much equity should you give away before you know what somebody will really deliver for you?

It's crucial to approach the situation carefully.

Here are the key considerations founders should weigh:

1. Value of the Advisor:

   Assess the advisor's value to your startup.

   • What specific expertise, network, or resources can they bring to your company?
   • Are their contributions unique and difficult to replicate?
   • Advisors who offer significant, tangible benefits to your business might justify a larger equity stake.

   Most great advisors who have your best interests at heart and are confident in what they can deliver will find ways to add value before you do a deal. Be much more wary of people who make promises but won’t do anything to help before anything is signed.

2. Market Norms:

   Understand the typical equity compensation for advisors in your industry and region.

   Equity arrangements can vary widely, but there are norms and guidelines, such as the FAST Agreement by the Founder Institute, that suggest reasonable equity percentages based on the stage of your company and the advisor's involvement:

   https://fi.co/fast

3. Vesting Schedule:

   Ensure any equity awarded to advisors is subject to a vesting schedule, similar to employee stock options.

   This protects your startup by ensuring advisors remain committed over a period, typically 1-2 years, with a cliff period before any equity is granted.

4. Impact on Future Funding:

   Consider how giving away large equity stakes early on might affect future fundraising efforts.

   Investors will scrutinise your cap table, and excessive equity allocated to advisors could be a red flag, suggesting you may not have retained enough equity for future funding rounds or to incentivise key employees.

5. Alternative Compensation:

   Explore alternative or complementary forms of compensation.

   Sometimes, advisors are willing to accept a lower equity stake if paired with other forms of compensation, such as cash payments, especially if your startup has sufficient funding.

6. Equity Pool:

   Keep in mind the total amount of equity allocated for advisors, employees, and other key contributors.

   It's important to manage this equity pool judiciously to ensure you have enough to attract top talent and advisors throughout the different stages of your company.

7. Negotiation:

   Be prepared to negotiate.

   The initial ask is not always final, and there's often room for negotiation.

   Be clear about what you're willing to offer and be prepared to walk away if the terms don't align with your startup's interests.

8. Legal and Financial Advice:

   Consult with legal and financial advisors (or even founders who have trodden this path before).

   Understanding the implications of equity compensation is complex, and professional advice can help you make informed decisions and avoid pitfalls.

   Ultimately, the decision should align with your startup's long-term strategy and growth plans.

While the right advisors can provide invaluable support and accelerate your company's success, it's essential to ensure the equity compensation reflects the contribution that they actually make, rather than what they promise.

Whatever you give should leave your business positioned for future growth and investment.

It’s rare that any one advisor will end up being a complete game changer for your business, and the ones that claim they will be are generally the ones for whom you should reserve the greatest level of scepticism.

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