Early Stage Advisor Equity Grants
I have been thinking about early stage equity and advisor grants for some time, including a post in 2016, that I rely on and wanted to revisit. I have had a few founder friends reach out to me asking about how much equity to give to an advisor, and had some operators reach out asking how to become an advisor for an early stage founder. With this in mind I am updating my thinking and math from the previous post, as well as adding some new questions.
If you are looking for a primer or how much early stage equity to grant to advisors, this is it. I have been on both sides of the cap table of advisors. I have seen some good things and some bad things, and some things in between. My goal in this post is to share what I have seen, introduce some of the right questions, and ultimately set expectations for both sides. Unfortunately I have also seen some predatory behavior, and promises made that can’t be kept. I caution everyone to use the questions and diligence techniques provided here to make sure there is a fit for both sides. With the right kind of experience and help, advisors can be a welcomed addition to the extended team, be a great group to lean on, and help the business.
What is an early stage advisor?
An early stage advisor is someone that has something that you or your company needs to succeed that either you don’t have, or you need more of. They are bringing a set of experiences that can contribute to making better choices, asking the right questions, avoiding mistakes, and simply helping you in some way. In many cases they are a support system, someone to bounce ideas off of and brainstorm, and try things out before going to the board or other investors. They can tactically help in one or many ways. They can help recruit and close candidates. They can help open doors and close sales. They can help provide strategic and high level advice, and be a sounding board. They can help with technical challenges they have faced. Overall, they increase the likelihood of success you are trying to achieve. They can help avoid making the same mistakes they have made. They are incentivized for the long haul with the company, typically in the form of equity, and sometimes payment for their time and effort.
Types of Early Stage Advisors
I think there are 3 types of advisors to startups;
Level 1 (.05%-.25%): Those who are there for the company in the early years (lets call this years 1-3) I believe these advisors should get somewhere between .10%-.25% as equity compensation. This allows you think about having a handful of advisors at this level – depending on how you allocate equity.
Level 2 (~.50%): Those that are there as the company is scaling (lets call this period years 4-6) I believe these advisors are going to provide meaningful leverage to your business, contribute meaningful time – possibly structured on a twice monthly basis, and constantly be there for other material reasons. This group is somewhere in the .50%+ range and can be as high as 1%.
Level 3 (1%+): Those are are needed later in a companies life cycle (lets call this years 7-9). These are the heavy hitters that provide significant leverage. They may take a very hands on approach if early, or are lending some major firepower if later. An example here is Shaq taking 1% of Ring and doing major endorsement deals and marketing. This certainly isn’t for everyone, but thinking about this early allows you to plan for someone like that joining 5+ years into your business. These advisors are somewhere in the 1%-3% range.
There are certainly advisors later in a companies life, say when they are ready to go public or are publicly traded but I will leave that to another post.
Your mileage may vary, but each of these stages is critical, and the operational firepower you need can be vastly different. Some are there the entire time. Some are not. An underutilized action by founders is canceling their vesting due to lack of interaction or help with your company. There are also those that ebb and flow with a company. There may be a chapter or two that things go quiet for that advisor, while there may be other times they spike activities and their experiences and leverage is meaningful. I have personally experienced this, and with the right relationship and communication in place it can be an asset to the founders.
How do you find early stage advisors?
I personally love the organic nature of many relationships that have grown to be formal advisor roles. There is a natural flow to spending time with a founder and jamming on ideas, then coming to a point that things get more serious. Typically, this is after you as an advisor have proven your worth. If you are a founder reading this, and someone is promising you the world in exchange for equity – let them earn it.
While nobody likes to do work for free, they should be more than willing to show vs. tell what they are capable of.
If you are an operator looking to advise companies, think about how you can join communities, accelerator programs, mentor programs, or similar roles that put you in close proximity to companies. Be sure to adhere to the policies and ethics of a program – many are not setup to provide economic compensation (cash or equity) and want people to volunteer their time. I have been doing this with the TechStars organization for over a decade and its an incredible way to give back.
How do you have the “ok lets talk about equity” talk?
This post! Since 2016 I have had people lean on me and my blog post for the talk. Like all things, waiting to have the hard conversation is never a great idea. I invite you (kind reader) to share this post with your advisor, or a founder as a place to point to and say “I found this post, and we should probably have a tough conversation about formalizing this role.”
Let this post be the “bad cop” moment in your relationship. Lean on the questions and comments here as a way to provide a framework for the conversation, a guide for equity and vesting, and a place you can both reference.
I have had many people come back and say “thank you” for sharing this framework because they are able to step away from the equity chat or the tough advisor conversation and rely on someone who has instrumented these agreements over the past 10 years.
Questions to thinking about and “talk tracks” for the advisor talk.
Do any of these scenarios sound familiar?
You have been meeting up with a founder weekly or every other week to jam on their new idea/company and really loving it. You are able to answer their questions, share your knowledge, and generally help them in ways that feel great for you and demonstrate real progress for the business. You have other advising relationships, a day job, maybe some investments and this company is headed in one or more of the right directions. Things have been picking up lately, more calls, more jam sessions, more meetings and more advice. You are not yet a mega-billionaire and time is precious and you are thinking about how to talk to the CEO about becoming an advisor to the company.
You have been meeting, regularly with a potential investor, who has considerable experience. Spending time with them asking questions has been great. They have really helped you out, and their area of expertise has proven valuable. You have been able to lean on their experiences to your advantage, always making your own decisions, but having a sounding board has been great. You would love for them to invest, you would love for them to advise, but you are not sure how to ask. [Having them on your cap table, or even in your slide deck as an advisor would bring you credibility.] [Having them in your corner as an investor or advisor would be great, people may not know their name but they have demonstrated some real value to what you are building.] Adjusting the last part as advisors do not need to be famous names.
If any of these match what you are going through, you have come to the right place. Below are some of the talk tracks I share to have The Talk.
How can I ask someone to be a formal advisor if I am a founder?
Things have been going great in our jam sessions, I would love to formalize something and speak on a regular basis – would you be an advisor to my company?
I noticed you have been spending more and more time helping us out and I wanted to see if coming on as an official advisor would be of interest?
Having you be a part of our journey would be amazing – would you join us as an advisor?
These are easy conversations for a founder as they hopefully are surrounded by people that want to help. Be aware of predatory advisors who ask for too much and deliver too little.
How can I ask a founder to be a formal advisor?
We have been meeting together for the past few months on a regular basis and I have been really enjoying it. I would love to formalize things and be an advisor, as I have some upcoming things to schedule and I really want to prioritize time with you.
I find myself coming back to what you are building often, since we have been meeting so much I wanted to see if you would be open to me becoming an advisor.
I have a lot of things pulling me in many directions and I want to prioritize things I really like and my own time. I would love to be a formal advisor and keep spending the time and energy on helping you with your company.
Obviously contour these to your own language and personality, but since so many others have found this helpful I wanted to publish them here.
How does vesting equity with an advisor work?
Most advisor agreements I see are paid in equity. Vesting happens monthly or quarterly, that can be canceled with notice if the person disappears. I typically recommend 3 year schedules; Quarterly vesting with no cliff.
What does this mean in plain english? Someone is vesting into the advisor grant you have offered them, earning equity equal to 3 months divided into 36 months for each traunch.
A simple example to speed things up:
Advisor A is given a 0.25% equity grant in Startup 1
Advisor Equity Details: 3 year period, quarterly vesting, no cliff
Months 1-3: 0.25% / 36 months = .0069%
Ownership at Month 3+: .02%
Ownership at Month 6: .04%
Ownership at Month 9: .06%
This means the advisor is earning 1/36th of their equity every month, vesting quarterly. Another way to put this is they are earning 3/36ths every quarter. The benefit of this model is that you get a built in checkpoint for hard conversations.
I would advise (ha!) having a conversation about “how it’s going” every 6 months or so. You can set this up formally at the beginning to make things less awkward. Here are a few check in questions for a founder to see how things are going with an advisor.
What are good check in questions to ask advisors and yourself every 3-6 months?
What do you want more of? What about less of?
Is this person contributing meaningful cycles, leverage, and support to my business? If not, should they keep vesting?
Looking back, have they made a difference for the trajectory of the business?
Have we leveraged everything they bring to the table?
If they weren’t available anymore, what would we miss most?
Is there something that we brought them on to do that we haven’t talked about yet?
What are good check in questions for an advisor to ask a founder every 3-6 months?
Are there things I should be doing more of?
Are there things I should be doing less of?
What do you need right now that you don’t have?
If I gave you a magic wand, what would you use it for in your business?
What’s the most proactive thing you can do for the founder? (If lost, try adding today, this week, this month)
What are answers you are searching for this week/month?
Questions to ask a potential advisor:
1. How many startups do you currently actively advise? (Who are they?)
2. How many startups do you think you can effectively advise at a time?
3. What is the best way to communicate with you? (Email, text. Phone, secure messaging app?)
4. How much time do you have to spend with me and my company?
5. When would you be willing to setup a recurring time to chat? Twice monthly? Weekly?
6. What are your super powers I should know about?
7. What would you like to get out of being my advisor? (Money? Experience? Fame? Something else?)
8. If things spike and I need your help, how do I get you spring into action?
What are some outcomes of being an advisor?
Unsurprisingly, most advisor equity doesn’t amount to much. It’s not uncommon for startups to fail, and therefore advisor equity is worthless. I try to prepare myself for this, but of course it’s easy to think “this time it’s different!” The universe seems brightest at the beginning, and while hard times are ahead, it’s exciting to be early.
To step back and ask the right questions can be helpful to set expectations and ground rules, especially when things get tough. This is of course a great time to remember that it is about the journey and not the destination. While companies fail all the time, people do not. It’s important to recognize that you are a support system to the founders and team, and the road is long. You never know what the next swing will look like. Trust me.
In the case of a truly venture scale outcome – meaning the business is worth billions of dollars – advisor equity can be worth quite a bit. In cases where there are smaller outcomes, acquisitions for stock in another company, or buyouts from later stage investors the outcomes can vary.
I have found the biggest benefit to being an advisor is the proximity to innovation that is happening with amazing people. I still pinch myself to believe that a very special set of founders want to spend their precious time with me!. As mentioned previously, in the end it really is the journey – which can sometimes be very long – and you never know what is going to happen. The learning and growth I have experienced personally has contributed to me in many ways beyond wealth and I look forward to continuing to invest and advise startups.Tags: Advising, Building The Machine