How much equity should startups give advisors?
How much equity should early stage startups give advisors?
In general rule, early stage startups compensate advisors with 1% equity in the company. This amount varies according the advisor’s area of expertise, role within the company, and the stage of the company.
There are 3 different kind of advisor usually found in startups
Board Advisors are usually experienced ex-founders or industry experts whose input is sought into the strategic direction of the company, and they are given a seat on the company’s board of directors to help shape the company strategy and decision-making.
Technology Advisors can help the company with broad knowledge of the state of the tech sector, implementing technology best practices (Scrum, Agile), system architecture (SaaS, scaling, blockchain), or even code themselves. They are often there to shape the longer term tech vision and roadmap in a way that would be too time consuming for a CTO who ends up getting consumed by the daily task of delivering an amazing product.
General Advisors are similar to Board Advisors, but do not sit on the board of a company. This does not indicate that they have less experience, but simply that they have less input over the strategic direction of the company. For example, an ex- Chief Marketing Officer from a different industry to the startup might be an invaluable General Advisor.
Advisor compensation vs company valuation
The higher the valuation, the lower the amount of equity an advisor should expect to receive. However, the fact that the median value is the same at 1% for both categories indicates that 1% is the most popular (modal) amount of equity to be given to advisors across a wide range of company valuations.
Advisor compensation vs role
The result observed here is that General Advisors get less equity than Board or Technology Advisors. This may be because Board Advisors have a defined director position with corporate and legal obligations, and Tech Advisors work more days (on average 43 days a year) than the other advisor roles. Or, it may be simply that General Advisors are more often chosen as figureheads for the pitch deck and web site.
Advisor compensation vs time commitment
Now this one surprised us! It seems that there is a very clear separation in the compensation for advisors who work more than two days a month and those who work less. Two days a month seems a tipping point — fewer than 2 days a month commitment may indicate an advisor being hired as a figurehead, someone to impressing on the company pitch deck or web site, someone who will actually contribute little real time (and in our view, little real value) to the company, whereas above 2 days a month indicate a ‘real’ time commitment — and as can be seen this commitment is suitably rewarded.
References
[1] seedlegals.com
[2] twenty20.com
