If you’re in the process of building your startup, you could be considering the level of equity to provide advisors.
Typically, startups in the first stages will provide advisors with 1% equity. However, the level is dependant on the expertise of the advisor as well as the role they will take in the company. Startups at a later stage may also provide more to their advisors, especially if those advisors are instrumental in finding investors.
Different Types Of Advisors
Board advisors may be experts in the industry or potential ex-founders. Their support will help form a strategy for the business. They will usually be provided with a seat on the board of directors and aid with crucial decisions.
There are also general advisors. The key difference between general and board advisors is that the former will not sit on the board. Despite this, they could still have a similar level of experience, despite being provided with less say on the direction a company will take. An example of this type of advisor would be a former chief marketing officer who used to operate within a different industry.
Finally, technology advisors will provide advanced knowledge of the tech sector and ensure that the company does use the best practices. This could include coding or even system architecture. Typically, these advisors will work to ensure the longevity of a company. They will put a plan in place that the board can follow or refer to. This provides the CTO with more time to focus on the delivery of the product.
It is worth noting that these different types of advisors will gain different levels of equity due to the influence that they provide.
Should You Compensate With Cash Or Equity
There’s no right answer here and either could be a suitable option. This will come down to personal preferences, or more likely what your venture can afford at any given time. However, there are differences in the way that compensation is provided to particular types of advisors.
Tech advisors are most commonly provided with a mixture of both equity and cash as compensation. Board advisors may not receive any compensation and one poll suggested this occurs 36% of the time. The same study suggested that general advisors were the most likely to be compensated with equity rather than cash.
It’s interesting to note that equity is also based on a variety of other factors as well. This includes:
- Company valuation
- Days worked through the year
- Advisor type
The Impact Of Time Commitment
You would expect the level of time commitment to impact the compensation provided. However, what’s interesting here is the level of time commitment that causes a change to compensation. Specifically, if an advisor is working more than 2 days out of the month, they will be providing real value to the startup. In contrast, any time which is less than this, suggests that the individual is taking a figurehead position. This could be to solidify the position of the business in the eyes of investors while failing to provide any actual value.
In contrast, more than 2 days per month suggests a true commitment to providing real value to the business and this is often rewarded with higher levels of compensation.
The Effect Of Company Valuation
A high evaluation will typically lead to a greater percentage of equity being provided to an advisor. This is perhaps to be expected. However, it’s worth noting that the most popular option is still to provide 1% regardless of the company valuation.,
The Impact Of Role
As mentioned, the role does impact the level of equity advisors gain with general advisors typically receiving the lowest percentage. It’s possible that this is connected to time commitments as tech advisors will need to ensure that they work more days to provide the right level of service necessary. The average is close to 50 days per year. As well as this, board advisors will have a more cemented position within the business and may even be held by legal obligations. General advisors may also be prime candidates for a figurehead position which means they offer little to no value for the startup.
It’s clear then that while there is a standard of 1%, there are a variety of different factors that impact the level of equity provided to advisors for a startup. Generally, the main consideration should be how much value the advisor is offering to the company and whether they are being fairly compensated for this contribution. It’s important to do this to ensure that advisors do remain at a startup for the long term.