How much equity do I give to my Board of Advisors?

QUESTION:

I am about to ask a few advisors to join my startup and wanted to know how much equity to give. I believe that the typical range is between 0.01% to 3%, depending on experience and other assets the advisor brings; however, I’d love to get more specificity within that range. For example, below are a couple scenarios I’m considering, and I would like to get advice on reasonable equity grants:

Scenario A: EVP at a high-tech firm, and previously a CEO at a start-up. Meet monthly as an active advisor. Will agree to 2 introductions a month with C-level executives and accredited angel investors.

Scenario B: Same as above, but will also attend the meetings and more actively fund raise for us.

ANSWER:

Steve Hoffman

by Steve Hoffman, Cofounder of LavaMind

I agree the typical range is between 0.01% to 3%, depending on experience and other assets the advisor brings.  It also depends on what stage your company is at.  1% of a startup without VC funding is very different from 1% of a later stage startup with VC funding.  The % depends in large part on the valuation and prospects of the company.

Let me begin by saying that many startups sign up advisors who do nothing more than provide a halo effect.  By that I mean the advisor’s name is known in the industry and looks good in a press release and on the company website.  The advisor actually doesn’t do anything more than give his/her blessing to the company.  It’s basically paying for a name, and often it’s a good investment on the part of the startup.

Other startups actively engage their advisors.  Usually there are advisor dinners or meetings once a quarter or so.  The sad fact is that the majority of advisors start off well but wind up doing very little a few months down the road.  It’s smart of you to get a commitment from your advisors upfront.   Specifying exactly what you expect the advisor to deliver in writing is an excellent idea.   For example, in your case, you are asking your advisor to make two introductions a month, as well as attend one meeting per month.  This is a good idea for two reasons:

1)  Before signing on, the advisor knows what he/she is getting into;

2)  If the advisor isn’t delivering, you can remind the advisor of his/her commitment.

As for compensation, I typically see 0.25% for a Series A venture-funded company.  Sometimes it’s more, and sometimes it’s less.  I don’t know what’s right for your company because I don’t know the individual advisors you have in mind or anything about your company.

That said, in Scenario B, it would be good to flush out exactly what you expect from that advisor and get it in writing.  It might also help to have two classes of advisors: (a) those who join your official Board of Advisors, and (b) Company Advisors.   Company Advisors are people in the industry that you want to befriend but don’t expect to do too much work on your behalf.  In this case, you can call them advisors but only give them a token amount of equity.

Another thing to consider is whether or not to treat your advisors equally.  Some advisors will get offended if you give more to other advisors than they received.   Usually, I try to give a set amount of equity to every member of my Board of Advisors and another set amount to all the Company Advisors.  Then you can give a bonus amount to a particular advisor based on additional contributions, such as in Scenario B.

Another good idea is to tie additional equity to goals.  For example, you could give all your advisors 0.25% to begin with, and if they hit certain goals, like making 5 or more key introductions a month, then after the first year they get an additional 0.25%.   This way you motivate your advisors to really perform.

There are lots of variations on this theme.

I hope this helps!