11/22/2016

Top 3 things to consider when giving Advisor Equity

As a startup, you always think whether you are managing your equity in the right manner. There are numerous sources out there who warn you about the perils of giving away too much equity too soon. And then there are those who talk about giving equity to the right investor, creating option pools and getting your valuation right and all the fun stuff! What doesn’t get the attention it deserves is “Advisor Equity”.

As the name implies, advisor equity is the portion of equity that you keep aside and give out to your advisors. Advisors add to the credibility and give a stamp of expert approval to your startup idea. Below are the Top 3 things you should nail right to maximise your return on investment from your advisor equity

1. Choosing the right advisor – This is probably the most important and the most difficult to determine. When choosing your advisor, don’t be blindsided by the star quality of the advisor, the question to ask is how relevant are they to the kind of business needs you have. Additionally, what matters is how much time he/she is willing to spend in supporting you to grow your business. It doesn’t help your business if all you have is a nice picture to put on your investor deck. It’s the actual bandwidth and muscle they provide you with, on your journey from a startup to an established business, that matters really.

2. Determining the quantum of equity – Now this is a question which gives many a founders sleepless nights. Am I offering too little, am I offering too much? While the industry average ranges anywhere between 0.5-5%, it really is a frank discussion that you need to have with your chosen advisor, while keeping in mind the stage of your startup and the commitment from the advisor. Giving too little might not make it interesting enough for them to invest adequate time in you, while giving away too much is something that enough has been written about.

3. How to give equity – Should the equity be given upfront or should there be a vesting pattern? Is the anti-dilution clause warranted? IMHO, giving equity in the form of restricted stocks or options works best, with the flexibility to terminate the arrangement in an amicable manner, should things not work out as anticipated. A claw back clause can save your startup from the perils of being stuck with the wrong advisor. On the other hand, it is very difficult to do an objective appraisal. Hence, best to go for a time based or activity based vesting arrangement, which ensures continued engagement from both parties.

Sometimes, it’s easy to be tempted to save this chunk of equity by relying on ‘mentors’, who give free advice, but basically anything free is worth just that – nothing. So, it’s a wise business decision to onboard the right advisors and give them their due compensation. While equity is valuable to you as a founder, to an advisor it’s just a piece of paper, till they’ve helped you navigate the path to success.

Blog Source: Linkedin