Founder's Guide to Advisory Shares

You might have been taught when you were younger not to cut corners.

That’s a good message to send to kids, but like a lot of advice - it lacks nuance.

In general, “don’t cut corners” is a worthwhile lesson to teach young kids to encourage hard work, but there’s a shortcut that I believe is critical for people to always take advantage of, especially when running a startup. 

Always look for ways to avoid learning something yourself.

And how do you do that? Well, surround yourself with people who know how to do what you want to do. Easier said than done, you might say…

The Importance of Advisors & How to Add Them

There are several ways to surround yourself with really smart people. One way is to have great friends who have done it before and have expertise to share with you. Another way is to hire people who are incredible employees and provide expertise internally to your team. You can also accept money from well-networked and talented investors.

But one approach to adding expertise some people overlook is bringing on formal advisors. This can make a huge difference in your trajectory.

You may have people in your network who are smart and want to help you, but there's nothing like including a financial incentive to ensure someone spends significant time and effort supporting your case. That's what having a formal advisor gives you- someone who wants to help you and is doubly encouraged to do so because they have skin in the game.

Adding advisors is a particularly important concept within venture-backed companies because the whole goal is to take investment and create a return as quickly as possible. This is very hard for most to do with just the amount of expertise in their own brains, and in case you feel like you should be able to do this on your own…. most top companies have added advisors along the way to supercharge their growth.

Choosing the Right Advisors and Compensating Them

When it comes to taking on advisors, founders often make mistakes choosing who to work with and how to compensate them. I often see founders bring on any random person who shows interest in or support for their company. On the other end of the spectrum, I also see founders try to bring on the fanciest name that they can possibly get.

Both approaches don't fit the criteria that I have for a great advisor, which is someone who has a well-defined way to support the growth of the company.

That means a great advisor could be someone who might have zero name recognition but has expertise and a willingness to spend time with the company. Another great advisor might be someone who may not be very warm and fuzzy but drives you to make progress through their insights and candor.

These two advisor personas will be much more valuable than the very friendly advisor and the "sexy" big-name advisor, both of whom make you feel better but don’t actually make the company better. That latter outcome is what you want (if you didn’t realize 😜 ).

Mistakes in Advisor Compensation

Founders often make mistakes in both the amount and structure of compensation for advisors. The first thing to remember is that equity should be considered extremely valuable even at the earliest stages of a company.

Don't be tempted and fall into the trap of giving away tons of equity just because someone tells you the company is not worth much today.

In my experience, the typical equity range for advisor shares is between 10 basis points (or 0.10 percentage points) all the way up to one to two full percentage points.

On the extreme side, these advisor ranges can go lower to 5 basis points (0.05%), all the way up to very high numbers like 3-5%.

For a middle of the road advisor who provides standard expertise and advice on a consistent basis, *my common directive is for companies starting out to anchor at 50 basis points (0.5%) and then adjust as needed from there.

Reserve full percentage points only for an advisor who will be an absolute kingmaker and make a massive difference in your company. Perhaps they are someone who has the relationships to open up big streams of business for you or can connect you to the companies that will eventually acquire you or accelerate your growth.

Wherever you are in the amount of compensation that you decide on granting an advisor, make sure that there is structure around it so that you get the specific value that you expect. More on structure below, but think through what deliverables you think you can get like intros. If the expected value is more amorphous like “general help advice”, make sure you access it via regular meetings, regular interaction points, etc.

It's important to think through all of this because the equity that you give away is extremely valuable. It can be used to incentivize full-time employees and to join the company and work hard, as opposed to a random advisor who doesn't deliver any value.

Important Structure for Advisor Shares

One important piece of structure to implement is vesting provisions. Vesting provisions are the rules that impact how and when people earn the options allocated to them. Just because someone has been promised 1% of the company for being an advisor, doesn’t mean they get all those shares once the ink is dry on their agreement!

While vesting can be triggered by almost anything, most vesting provisions are based on time. In other words, an advisor earns their shares as time passes. Those time-based vesting provisions generally mean an advisor will earn an equal amount of their total allotment each month over the life of the advisor agreement.

Set expectations

Whatever vesting provisions you setup, make sure you also confirm a mutual understanding around the value that should be delivered and a regular evaluation of whether or not the advisor relationship meets expectations.

Why is that?

After signing an advisor to an agreement that promises 1.5%, if you find out after a year that this advisor has used up all of their network and all their connections to provide value and is now just sitting on the sidelines, you should feel very comfortable cutting off that advisor relationship.

An advisor should not get their full allocation of advisor shares without continually providing value, the same way an employee would be fired if they stopped coming to work, and the same way a co-founder may be cut loose if they ceased delivering for the company.

With any relationship, challenges come up when clear expectations are not set. This can lead to disputes and a tricky termination conversations.

These situations are always slightly uncomfortable but they’re VERY important and way easier to execute if you set the expectation ahead of time that you will be continuously evaluate the relationship.

Fair Vesting Schedule for Advisors

Should there be a cliff?

A cliff refers to the minimum amount of time that someone needs to remain in service before they start vesting any shares.

I usually don’t see advisors having a cliff, although putting a one- or two-month cliff just to test things out could make sense.

How long should the vesting period be?

This is negotiable and you should choose what fits your situation. The most common terms I see set vesting over 2 to 4 years on a straight-line, month-to-month basis.

Advisor Shares and Equity Compensation

Advisor shares can take on a handful of formats, but it most often takes on the structure of an NSO (a Non-qualified Stock Option).

You can think of an advisor as an independent contractor who (usually) doesn't get paid cash, so they only have equity compensation for the work that they do. Their equity will most likely show up on a cap table very similar to the equity of an employee, come from the same ESOP (Employee Stock Option Pool) used to compensate employees, and if you release the advisor before all of their advisor shares have vested, that equity can be returned back to the company and reallocated as the company sees fit the same way employee options can if they are fired.

Finally: Regular Updates With Busy Advisors

One last recommendation….

While, the type of advisor you're working with dictates the expectations around how you’ll work together, one thing is consistent. Always setup a regular check-in schedule.

For advisors expected to provide extensive feedback, advice, and expertise, it's important to establish a routine for meetings led by the founder. These meetings should be meaningful, with both the founder preparing in advance and the advisor committing their time regularly, often on a monthly basis. However, frequency can adjust based on current needs.

Even “kingmaker” style advisors who might have vesting based on facilitating certain connections would benefit from an update meeting to ensure everyone’s aligned even if it is less frequent.

The update meeting is a small add on to an advisor relationship that can help maximize the value you get for those valuable points of equity

Wrapping Up

I've witnessed the full spectrum of advisory relationships.

On one end, I've seen scenarios where advisors were overcompensated with equity for minimal contributions, effectively draining the company's equity pool. On the other, I've witnessed advisors add significant value, many times beyond the equity they were awarded.

Advisors can be the reason companies get acquired. They can be the reason top employees join the company. They can be the reason investors put capital into the company. With the right approach, founders can add advisors to their companies and build in amazing shortcuts that lead to these outcomes in less time with less pain.

Good luck shopping for advisors!

Key Takeaways

1. Embrace the Shortcut of Leveraging Expertise: One actionable shortcut for startup success is actively seeking the wisdom of others rather than figuring out everything on your own. Surround yourself with intelligent individuals who've walked the path before you, be they friends, experienced employees, well-connected investors, or formal advisors. This strategic move can shortcut your route to success.

2. Select Advisors with Care: Not all advisors are created equal. Prioritize potential advisors based on their ability to really contribute to your company's growth. Look beyond the allure of big names or those who just offer moral support. Focus on people who provide straightforward, unbiased advice, and possess the specific expertise your startup needs.

3. Equity is a Precious Resource: Treat equity like the priceless resource it is, even in the early stages. Avoid the temptation to overcompensate advisors simply because it seems your company holds minimal value at the moment.

4. Structure Compensation with Clear Expectations and Accountability: Offer advisors a structured compensation plan. Clearly outline what is expected in terms of deliverables or regular advisory engagement. Incorporate vesting provisions typically spanning two to four years to ensure advisors remain motivated to contribute over time. This ensures that the advisor's incentives align with the company's success and prevents unearned equity dilution.

5. Regular Evaluation and Open Communication are Key: Set regular check-ins with advisors to ensure mutual expectations are met. These meetings offer opportunities to evaluate the advisor's contributions against the agreed-upon objectives. Maintain open lines of communication to address any discrepancies early on. If an advisor isn’t fulfilling their role despite the implemented structures, feel unbound to reconsider their place within your startup to protect your company's equity and future growth.

6. Setup Regular Check-ins to Maximize Value: advisors are normal people who do more when there’s a bit of accountability. Maximize the value you get by establishing a regular check-in schedule with them!

Be chased,

Jason

I like this volume analogy. Remember what you need to be shouting and what should only be heard for someone who listens a 3rd or 4th time

I. LOVE. THIS. Such a good reminder for fundraising decks

Accurate 😜

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