How Much Equity Should You Give Away To Your Startup Advisors?
Unless you are planning to bootstrap your startup all by yourself, you will need to bring in funding, advisors, and mentors. Startup advisors will do anything from calling your potential customers to helping you set up funding meetings with VCs. The downside of having an advisor is that you might have to give away early equity of your startup which can make a big impact in the future rounds. So, how much equity should you give away to your startup advisors?
Benefits Of Having Startup Advisors
Having startup advisors can help you jump start and get your startup going. Most advisors have already been through the startup phrase and have been very successful entrepreneurs. Its quite common that startups have multiple advisors that specialize in different fields. If this is your first shot at creating a startup, you might not be familiar with how funding rounds work or how to put together a board of executives. You might also be confused on how to incorporate or who should be your first hire. This is where an advisor can help you out. An advisor can walk you through the process, help you build your business, and most importantly assist you in the growth of your startup.
Cons of Having Startup Advisors
The old Chinese saying goes, “There is no free lunch in this world”. Same with having startup advisors. In exchange for their expertise, you usually would need to give them early equity of the company. Startup advisors usually do not breathe on your neck like a manager would. Matter of fact, most of the startup advisors only have monthly meetings with you. A lot of time startups bring on advisors only because they want the “halo effect”. In other words, it is like hiring Michael Jordan to help you promote your new apparel brand. This makes your press reports look solid and builds a strong trust around your early customers. The bad thing is that the advisors might not be providing any “true help” that your startup needs. In other words, you could be throwing away free money early on if you decide to bring on a few early startup advisors.
How Much Equity Do I need To Give Up To Startup Advisors?
The answer varies depending on the situation of your startup. If it is still at pre prototype stage, then you will be looking to give up at least 2-3% per advisor. If you have already prototyped a product, have a great team, and gain the advisors trust, then you could be giving away 1% or less. Finally, if you bring in advisors after angel rounds, you’re looking at giving away anywhere from 0.01-0.25 % of equity. How much equity you give away should also be determined by what the advisor can bring to the table. Some advisors might only talk to you one hour per month, while some might pick up the phone whenever you need them. The more active startup advisors hold monthly meetings, dinners, help you build partnerships, and brings along a powerful name attached to the company. These advisors should receive more equity than the ones that are just there for the halo effect. Advisors are like investors too. You can negotiate a deal with them. For example, you could give them 0.10% now, and if the company does well after a year you give them another 0.10%. Keep in mind that as your startup grows, your company is valued at a higher worth, so 1% might not be much in the beginning, but everything does add up in the long run. Be very cautious when choosing your startup advisors and determine the goal of you bringing in an advisor before you go out looking for one.