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by • August 29, 2012 • FoundersComments (2)328

How much equity do I give an advisor? What do they give me?

0.5-2% seems to be normal, trending toward the high end if you’re pre-funding and the low end if you’ve already raised a decent round[1].

Those numbers get completely thrown out when the advisor is your distribution channel. Last I heard, Tim Ferriss likes taking 5-10%[2], but he has a brand which allows him to heavily promote your product without annoying his [large and wealthy] audience. Dr. Dre supposedly took 90% of Beats by Dre, but now it’s the top headphone brand, so perhaps that was a good deal. I’ve heard of similar “advisory” requests from other big celebrities, ranging from a 50-90% stake, which is really more like a merger.

4 year vesting, full acceleration on exit, optional cliff

Edit: I wrote another post with details about what these legal terms mean and why they matter.

Going back to the more normal 0.5-2%, you treat advisor equity just like founder or employee equity: vested over 4 years. In some cases I cliff it, and in others I don’t — depends a bit on whether their role involves front-loaded effort or not (the more work they have to do in the first year, the less fair a cliff is for them).

Unlike the rest of the team though, advisors get full acceleration on an exit (e.g. if the company is sold, they get their entire stake immediately, whereas the founders often have to start a new vesting period in the terms of the acquisition).

It takes 2 hours per month to advise me

I send my advisors a weekly update email listing what I did, what I learned, what I am struggling with, and what I plan to do next. If it’s relevant for the stage of the company, I also send a financial snapshot. The same mail goes out to my investors (which I don’t currently have).

I also try to grab a coffee with each advisor about once a month, which I stagger so that I meet with a different advisor every week. I get regular intros & feedback, and they endure minimal demands on their time. My goal is for an advisor role with me to take them 2 hours per month: 30 minutes over coffee and 90 minutes of email.

Don’t rush to “fill” your advisory board. Add them as a strategic decision in response to specific ongoing problems they’ll be able to solve for you.

 

[1] Advisors get paid on an exit just like investors, so the investability & valuation of a company is a good heuristic for the value of the advisor’s equity.

[2] Don’t quote me on this! I read this stat ages ago and times do change.

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2 Responses to How much equity do I give an advisor? What do they give me?

  1. sean says:

    We need a simple model to help us properly slice the pie. It needs to be flexible and fair. By fair I mean it needs to give each founder what they deserve. And by flexible I mean it needs to adapt over time to re-allocate the startup equity so that the distribution stays fair until the fledgling company takes flight. check out Mike Moyer’s book slicing pie it talks about 50/50 share and how to divide it through his grunt calculator.

  2. Leah says:

    Looking forward to reading more. Great article.Really thank you! Keep writing.