Advisor Equity · Founder equity

How much equity should I give to an advisor that can bring very high value and open doors?

Serif Sisman Investor/Entrepreneur

August 17th, 2016

I have given my advisor's typical market %'s for equity and want to offer more equity and more responsibilities. This advisor not a co-founder and not considering a co-founder because this person is not technical in nature, which I lack. However, I want to compensate because I feel they can open many doors, get funding, and scale very quickly with their credibility.

Also, I want to make sure I don't dilute the company for later rounds and protect the equity for future funding and resources. I am still at the idea stage going into development.
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Mike Moyer

August 17th, 2016

You should be using the Slicing Pie model. It's a formula that allocates equity or profit interests based on the actual contributions from participants. This means you won't ever have to worry about guess the right number or bad dilution terms or time-based vesting schedules or getting equity back from past employees or all the other problems associated with equity splits. You just let the formula run and everyone gets what they deserve.

I've written a book about how it works and you can have a copy if you contact me.

Anonymous

August 17th, 2016

There's a few things in play here. Your industry matters as well as what you're expecting from the advisor. I think of them as a continuum between nearly operational involvement (just short of having an email address at your domain), to purely lending their name to you for a bit - all have their place and value. The stage you're in also matters: the later, the less the risk, the thinner the slice you have to offer. My sense of the common practice and my own experience is that you offer 1% on the low end and 2% on the high, depending on experience, name recognition, degree of involvement, etc. Going slightly over is okay, in my view, if you're a total novice and, particularly in your case of a solo founder, but not much over, because early inequities will have bad repercussions further down the line, as more people become involved and your management skills and style become subject to scrutiny. 

As well, if your advisor is going into it just for the money, you probably don't want them: nothing worse than to end up chasing your advisor for what you think is your own money. You want someone who has faith in you, and has a track record of fostering nascent entrepreneurs.

Good luck.

Greg Solovyev Still learning

August 17th, 2016

There is no one size fits all formula here and it should be a negotiation between you and your advisor. At the end of the day, an advisor is similar to a consultant that dedicates some effort to your company and wants to get compensated for that effort. The two question you need to answer is how much that effort is worth to you and how much your advisor values that effort. The equity stake should fit between the two answers. You should also be able to assign monetary value to the equity based on your assumptions and goals for when and how much your company will be worth.

Paul Garcia President at TABLE

August 18th, 2016

Have you considered a simple pay for performance model? Introductions are a dime a dozen, literally, and are about as useless as most "networking." Such connections are well-intentioned and seemingly attractive, but unless this advisor is actually inking the deals, they're not doing anything for you except annoying their contacts to waste some time with you and crossing fingers that your effort with their contact will pay them. Incentivize the actual outcomes and behaviors you want, not the path to them.

Mike Lingle Entrepreneur, I help startups start up

August 19th, 2016

I'm a fan of Mike Moyer's Slicing Pie concept (full disclosure: I've read the book but I haven't tried it in my own company yet). 

At the very least put a vesting schedule in place so you can eject advisors if they're not delivering value. It always sounds great on paper, but there's often a gap between what you're expecting and what you actually get.

Barry Burr founder, Barry Beams llc, a startup to re-light your night.

August 18th, 2016

Link the equity to performance.  Whenever someone asks for equity, I tell them its will be linked to performance.  Only award it after performance or financial benchmarks are reached.  Amazing how quickly that gets rids of the scheisters.

Rod Abbamonte Co Founder at STARTREK / @startupHunter / @startupWay / @CoFounderFound / @GOcapital / @startupClub / @lastminute

August 18th, 2016

The key point are how much value the accelerator program will bring to the business, how much experience they can guarantee and how comfortable you will be. Synergy, good relationship, confidence, same value perspective is more important them how much equity. We work in Sao Paulo with 3.33% for full commitment program.

Serif Sisman Investor/Entrepreneur

August 18th, 2016

Thank you all for your feedback and input. Very helpful. I am on the idea of equity to performance on financial benchmarks. I agree with Barry that it gets rid of the BS. 

Mike Moyer

August 18th, 2016

Linking equity to performance and financial benchmarks creates BS, it does not eliminate it.

Imagine you had a regular job. Each pay period your boss sat you down and said, "I've reviewed your performance and financial benchmarks and I'm not super happy so I'm going to pay you less than last week."

In order for that meeting to not turn into a major fight you would have to have EXTREMELY clear performance and financial benchmarks that were entirely under your control. Try getting this kind of clarity at a startup company (not going to happen).

You can certainly fire poor performers and people who don't meet financial goals, but trying to compensate them like this is a nightmare.

As I said before, use Slicing Pie, it will do 100% of what you need your equity program to do.