Founder's Guide to Advisors and Advisor Equity

Startup Advisor Seats

Advisor seats should be functional but not meant for comfortable long-term sitting

The purpose of this article is to help founders make better decisions when bringing on advisors. I will delineate perspectives that I believe are consensus beliefs vs non-consensus beliefs regarding advisors.

Two important things to know about advisors:

• Most VCs assume your advisors won’t do much

• Shorter duration arrangements with re-ups are better than longer durations

Most VCs assume your advisors won’t do much

As a start-up you might have potential talent or credibility gaps. A common perceived solution among founders is filling these gaps by referencing advisors on your deck or website.

This likely has a neutral impact on most early stage VCs. It is neutral because most VCs have the expectation that advisors won’t do much. The idea that most advisors won’t do much is a consensus belief.

Advisors support the perception that the founder(s) have founder market fit. This is more of a check mark than a convincing factor.

What’s most important about advisors is that they provide value to you as a founder ignoring external perception.

Here’s what advisors are useful for:

• Validation of existing ideas so you can move forward with greater conviction

• Expert opinions on their areas of expertise

• Introductions

Here’s what advisors are not useful for:

• Convincing an investor to give you money

• Understanding customers as well as you do

• Advice about anything outside of the expertise

Shorter duration arrangements with re-ups are better than longer durations

Practically speaking, you don’t want to fire advisors. There are negative repercussions from firing an advisor that are different than a normal employee. The right advisors will be connected and you wouldn’t want to damage those relationships potentially by firing an advisor. Equity allocated for advisors is a sunk cost with no optionality unlike employee equity.

The solution to avoiding wasted equity on advisors is shorter term arrangements for less equity. Think six months intervals with clear expectations. Avoid anything longer than one year because you likely are giving away equity for nothing. If the value the advisor brings in the first interval is satisfactory, you can always re-up for another interval.

What equity should advisors get?

Here’s where I share non-consensus opinions. My opinion is most advisors should get 0.1% for six months of whatever advisory services they provide. This adds up to 10,000 shares if you issued the standard 10 million shares for your Delaware C Corp per interval. This is for advisory services where I assume conversations are occurring once a month. If the conversations and help doesn’t justify this, don’t bring them on as an advisor.

That adds up to 1% (or 100,000 shares) for five advisors over the course of the first year. If you have three advisors, that’s 1.2% (or 120,000 shares) for three advisors over the first two years. This assumes everyone is refreshed for another interval. This probably won’t happen though.

The rule of thumb is advisor shares should add up to 1% - 2% equity in the early years.

What about advisors after the first two years? Your company should be in a place where you can offer less equity after the first two years because each share will be of higher paper value.

Have questions after reading this? Is there anything about advisors that I didn’t address. Feel free to ask me directly.