When it comes to compensating advisors for their time and expertise, many startups turn to equity as a form of payment. But determining how much equity to give an advisor can be a tricky task. In the end, the amount per advisor will depend on various factors, including their expertise, role in the company, and the stage of your startup. In this article, we will explore how to determine the right amount of equity to give to a startup advisor.
The most common equity amount which startups give to a longer-term advisor who works less than two days a month and is paid only in equity is 1%. This is a good starting point for determining equity compensation for general advisors. However, as mentioned before, the amount of equity startups give advisors varies according to the advisor’s expertise, role, and the business stage.
The three types of Startup Advisors
When it comes to advisors, there are typically three types that startups work with: Board Advisors, Technology Advisors, and General Advisors. Each type of advisor serves a different purpose and may require a different amount of equity.
Board Advisors are usually experienced ex-founders or industry experts. They provide input on the strategic direction of the company and are often given a seat on the board of directors. They help shape the company’s strategy and influence decision-making. Due to their level of influence and expertise, they may be given 1-2% equity or more than other types of advisors.
Technology Advisors help the company with their broad knowledge of the tech sector. They may implement technology best practices, system architecture, and even roll up their sleeves and join the development team. They help shape the company’s long-term tech vision and roadmap. Due to the importance of technology in today’s business world, these advisors may also be given 1-2% equity, but an alternative can be a cash compensation or a mix of cash and equity.
General Advisors are similar to Board Advisors but do not sit on the board. They may have less input over the strategic direction of the company but can still provide valuable insights and expertise. For example, an ex-Chief Marketing Officer from a different industry might be an invaluable General Advisor. They can be given 0.5-1% equity.
Advisor Shares vs Share Options
When compensating advisors with equity, startups have the option of giving them advisor shares or share options. Advisor shares are shares allocated as compensation to advisors. Share options, on the other hand, give the advisor the right to purchase shares at a future date at a set price.
There are several factors to consider when deciding between advisor shares and share options. Tax reasons, voting rights, shareholder approval, and vesting are all important considerations. It is important to consult with legal and financial experts to determine which option is best for your company and advisor.
Vesting Schedules
As with any equity compensation, it is important to include a vesting schedule for advisor shares and share options. A vesting schedule ensures that if the advisor leaves or is terminated early, he/she will not receive all of their shares or options. This protects the company’s equity and ensures that the advisor is committed to the long-term success of the company. A vesting schedule can vary, but it’s common to have a 4-year vesting schedule with a 1-year cliff.
Salary or Equity?
When determining how to compensate an advisor, startups must decide whether to pay them a salary or equity. Both have their own advantages and disadvantages. A salary provides a stable income for the advisor, but equity has the potential for greater returns in the long-term. According to data from thousands of UK startups, the type of advisor you hire influences their compensation. Board Advisors and Technology Advisors may be more inclined to accept equity in lieu of salary, as they are more likely to see long-term benefits. General Advisors may prefer a salary as they have less input over the strategic direction of the company.
Negotiate to Decide
Ultimately, the amount of equity to give an advisor will depend on the unique circumstances of your company and the advisor’s role. It is important to negotiate and come to an agreement that is fair for both parties. This may involve a combination of salary and equity, or a flexible equity compensation plan that can be adjusted as the company grows and evolves.
Pros and Cons of working with Advisors and giving them shares
Working with advisors can be a valuable asset to any startup, but it’s important to weigh the pros and cons before making a decision.
Here are some of the pros:
• Advisors can provide valuable expertise and experience
• Advisors can open doors to new connections and opportunities
• Advisors can provide valuable insights and feedback
• Advisors can help navigate the challenges of starting and growing a business
Here are some of the cons:
• Advisors may not fully understand or agree with the startup’s vision or goals
• Advisors may not be fully committed to the startup’s success
• Giving equity to advisors can dilute the founder’s ownership of the company
• Advisors may not be able to fully commit due to other commitments
In conclusion, when considering working with advisors and giving them shares, it’s important to consider the level of expertise, role, and stage of the company, and negotiate a fair and flexible compensation plan. It’s also important to weigh the pros and cons and ensure that the advisor is fully committed to the success of the startup. In the end, it’s comparable to choosing your co-founders and investors – make sure to select wisely, since you might be bound to work with those people for several years, and your selection will have a direct impact on your company’s odds to get successful.
