There’s a lot of ambiguity around distributing advisor shares as part of a startup. Startups without a significant amount of cash to adequately compensate advisors often turn to equity as a solution: give people who help your company grow a portion of the company. But handing out equity is something that founders need to do carefully.
First, let’s look at potential advisors, because there are a lot of different types of advistors. For example, there are people who will help your company extensively and who won’t ask for shares. At the other end of the spectrum are people who are almost trying to make a living by asking for significant chunks of advisor shares, and they may be over-promising the amount of help they can provide.
Give shares to advisors who will help your startup
If you’ve got a network, and you’ve helped other people in the past, you can probably get a lot of help without handing out shares in your company. But if you have an advisor who will be consistently involved and committed to your company over a long period of time, you may want to give them 25 basis points, which is 0.25% of the company.
If you have an advisor who is an amazing mentor and has an extensive network and the ability to make a funding round come together, you may give them as much as 100 basis points or 1% of the company. You would, however, want to vest that amount over four years and make sure they are continually working with you.
Other types of “advisors”
That’s the ideal scenario. But what about the other possibilities? The first rule you should always keep in mind is that if something sounds too good to be true, it probably is. You may encounter people who will promise to “take care of all your fundraising for 5% of the company.” You should immediately hear alarm bells going off in your head. After all, if they’re that well-connected, they would actually invest in your company. They would write a check, help lead the funding round, and invest in your startup.
Another scenario is founders who distribute equity to people who “lend” their names to your company but don’t really contribute to your startup. Entrepreneurs sometimes think that attaching a name might generate sales or funding, and that’s not often accurate. Rather than giving equity to non-contributors, you’d be better off selling the equity and hiring people who will be dedicated to the company’s success. Another point to remember is that if people recognize names on your presentation or on your advisory board, they’ll also know which people will truly participate in your startup. Adding those names to your pitch deck won’t help you much, if at all.
Choose the advisors who get shares wisely
Be focused and pick advisors who are really going to help your startup. It’s fine to reward people like that with 25 or 50 basis points if they are really committed to the success of your company. For a really amazing mentor that you’ve known for a long time and is a true asset, you may want to give them up to 1%, but you will typically only have one person like that on your capitalization table. Finally, beware of people who are only trying to make a quick buck. Once your advisors are in place, document the agreements with your lawyer and the advisors and set up a vesting schedule. Good, high-quality advisors can help your company enormously, and an equity agreement could be the starting point for a valuable partnership. If you want more information about advisor shares, contact us.