How should I price advisor shares?
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Strategic advisors can be a wonderful thing to a fledgling early stage startup. Experienced professionals can provide valuable connections to investment capital, leads to lucrative commercial deals, sage scientific and technology guidance or just a shoulder to cry on. While most of the tech world operates with a pay-it-forward mentality, that will only get a founding team so far. As The Joker said, “if you’re good at something never do it for free.”
There will likely come a time when the question of compensation comes up with your advisor and when it does you want to be ready. Negotiating arrangements like this are never comfortable but having an understanding of industry norms and benchmarks will put you in a much better position. The goal with these conversations is not to see what you can get away with. After all, this is someone that you will having work with your company for the next several years. Starting off with a sour taste will only hurt you in the long run. At the same time, nearly all of the advisor agreements I’ve seen involve equity compensation rather than cash so you want to be precious of your valuable resource.
Direct investment > Advisor shares
If you can swing it it’s always a better idea to start the conversation with an investment lens. You get all the value of their experience PLUS you get cash. Kind of an obvious point, but it’s surprising how infrequently this comes up. Investment aligns all parties with financial upside and has the added benefit of creating a “skin in the game” mentality, which can be a powerful motivator. Not every advisor moonlights as an angel investor so I wouldn’t be put off if they’re unaware of how the process works. You may also find that your advisor isn’t flush with enough cash to cut your minimum seed round check. In my experience a convertible note with a lower cap is fair tradeoff. A small investment (<£25K) isn’t going to have a material impact on your cap table and most lead investors are happy to accommodate this for top talent.
Benchmark your Offer
If the direct investment doesn’t work than go to the table with a structured offering. The range below provides some flexibility for the the caliber of the advisor and the time they provide. Typical agreements are for one full day of work per month.
0.25% — 0.5% for an advisor
0.5% — 1% for a non-executive director is standard
Set Objectives
You’re bringing the advisor on for a reason. Be specific about your expectations. Do you need help hiring engineering talent? Are you hoping to see commercial leads materialize? How much time do you expect from them per month? Will this time be in person or teleconference? You wouldn’t make a key hire without setting out objectives first, and your advisors are no different. You both should understand what the price is for the equity you’re granting. All of which should take the form of a signed advisor agreement.
Vest their Shares
When you raise your seed round you’ll almost certainly go on a three to four year vesting period with a one year cliff. The same is true for employees. It’s only fair that advisors go on the same terms. Vesting can sometimes get a bad rap, but ultimately it ensures that the people working on/for/with the company are in it for the long term. An advisor that pushes back on this is someone I would think twice about.
“In my view, one of your core roles as a founder is to act as the focal point of of a network of great advisors. As first time founders we’ve never done any of this before, so by far the fastest way to learn is to ask someone who’s been there and done that.” — Theo Saville, CEO of CloudNC
At the end of the day an advisor is an amplifier of your outcomes, so don’t get too worked up over assembling the perfect headshot slide for your deck. You, your cofounder and the team you bring on will account for 99.9% of your ultimate success. But of course the right advisor might provide that 0.1% just when you need it.
Thanks to Alexandre Flamant for helping with this post.