Should you give advisors equity in your startup?

godfather

“Are advisors worth it?” the young founder asked.

“Depends” I replied.

“On what?” he asked.

“On what you want them to do — and for how much,” I replied.

[ Click to Tweet (can edit before sending): http://ctt.ec/AW3U6 ]

Why Advisors Exist

Advisors exist in the world because there are people who could be valuable to your business, but who do not have the money to invest like angels and VCs do.

Advisors ask founders to trade “advice” and “work” in exchange for equity. Founders who haven’t raised money yet typically get advisors because, well, they are unable to get investors!

Cynics (typically VCs) say things like, “if you could get investors — who advise for free — why would you get advisors who don’t put any cash at risk? Those people are not earning their equity!”

The cynical folks are right 80% of the time — the advisors don’t earn their shares. However, they don’t earn their shares typically because the founders don’t create a clean set of expectations (deliverables!) with the advisors.

What Advisors Do & How to Manage Them

Advisors typically have some combination of great networks, great reputations, and serious skills. If you are doing a enterprise software company, having someone like David Sacks (Yammer, PayPal) would be a huge win because he is respected and has a huge network.

Of course, he has money as well, so having him as just an advisor would negative signal that he doesn’t think highly of your company’s ability to return capital — so be careful!

There is nothing wrong with having an advisor, but I suggest you do the following in the agreement so that there are no hard feelings:

  1. Vest the shares the advisor will receive over two years (you won’t need them longer than that).
  2. Typically they get .25 to .50 points in a startup — one point is they are a complete hero.
  3. Put a dollar value on that equity. If you give .50 in a company worth $10m that’s $50,000 — not a ton of money depending on what they do.
  4. Write a letter of agreement for what they will do for that equity. This should be as detailed as possible: e.g., the advisor will meet with the founder at the HQ 4x per year for two hours each time, be available for weekly phone calls, and help design and hire the sales team (if they are a sales expert).
  5. Make sure the terms of these options are clear: strike price, how long they have to execute the options if you fire them, 12-month cliff, etc.

There are really three reasons to have advisors:

  1. they help you land venture capitalists due to their name recognition
  2. they help you land talent due to their name recognition
  3. they help you solve specific problems with your business

I’ve seen the first two work really well. Having a big name like Kevin Rose, Gary Vaynerchuk, or Dave Morin as an advisor will get you a lot of meetings. Of course, all three of those folks have grown to have their own pools of capital to invest (so they don’t really need advisor shares).

I’ve been an advisor to a bunch of startups back in the day. That was when I would get some equity for being an advisor and I might put in a modest amount of cash.

Since I’ve become a more professional angel, with a formal fund and a huge AngelList Syndicate, I generally don’t do advisor shares any more. There have been rare occasions when I want to invest in a startup but their valuation is too high for me to justify. In those cases I’ve had founders give me an advisor grant to “sweeten the pot.”

While there is nothing wrong with these kind of deals, you do need to be careful you don’t have bad feelings between investors (i.e., I’ve been in a deal where I put the same amount in as an angel friend, only to find out they got advisor shares — awkward!).

It’s generally frowned upon for folks with a big chip stack to ask for advisor shares — because they have chips they could invest. So, if you’re loaded I think it’s better to invest than freely vest.

Firing advisors can also lead to very bad feelings with an early advocate (whom you selected because of their influence!). So be careful firing advisors without first talking to them about why you are disengaging, giving them a chance to correct, etc.

It’s the founder’s responsibility to get the most out of the advisor relationship. If you sign up an advisor, make sure you are using them!

Bottom line: Advisors are ok if the founder gets reasonable value from them, and that value is clearly defined in a document. If you and the advisor are not willing to clearly define the value exchange in a document then the value exchange is probably not good enough to have them as an advisor.

Any questions about advisor shares?

best @jason