I've heard some horror stories of advisors who asked for (and sometimes received!) 10-20% of someone's company, without delivering much at all. I also know an investor who committed the same startup funding as the two cofounders he was backing (they each invested $20,000). The terms? The investor received 20% of the company and would be paid back 100% of his money from company's first revenue. The founders later came to regret this. Amazing.
For a short period between 2017 and 2018 I worked as a startup advisor, primarily helping founders to raise money (a story for another day!). It's a hard way to make a living (I now understand why so few people offer this kind of help!), but it's great fun. I also learned a great deal, particularly from one of the advisory boards I sat on, which is a fine way of managing things, in my opinion.
What's a fair percentage of company shares to assign to a startup advisor?
Advisors can be a valuable resource for startup founders. If you're wondering how to remunerate them, here's an excerpt from an advisor agreement I've used several times. It provides a good rule of thumb re percentages:
This framework comes from the Founder Institute and it's worth reading their article for context, which can be found here.
Protect your equity: how to ensure you get value from advisors
Not all advisors are equal. Over the years several founders have told me that some of their advisors provided 10x more value than others, while receiving exactly the same compensation. If you're planning on appointing advisors, it's essential that you agree on clear deliverables. Advisors unlock their equity only by meeting their targets, deadlines and milestones, meaning their equity is purely performance based.
"I can transform this business, so I’ll need better terms than the other investors."
Sometimes you might meet an investor who tells you their presence on your cap table, network, and sheer reputation will make the next step of your journey a breeze.
How do you handle this?
Some investors think highly of their ability to add value, some so much that they expect to be rewarded. This is something founders need to handle with care. Here’s what I’ve seen:
- Over the last decade I’ve got to know many angel investors, some more proper than others. This is not something I would expect a proper investor to ask for.
- Most investors try to add value anyway. They like to help, realise it’s in their own best interest, and expect no payment for doing so.
- Some investors promise to go above and beyond, but usually it’s all talk. If you give these people equity before you realise they’re a dud, you can’t get it back.
- If you do a deal, keep the investment and remuneration entirely separate. Don’t muddy the waters by trying to combine the two. The investor should buy in on the same terms as the other investors, and have a separate agreement for advisory work.
- Make sure the advisor agreement is firmly based on commercial outcomes and/or deliverables, preferably with multiple, separate targets and discrete payouts when each target is hit.
- Don't talk percentages or, if you do, only do it at the very beginning. Agree on a fixed number of shares, awarded in chunks. If you need to issue more shares during the course of the engagement, your deal will be unaffected. If you've agreed on a percentage, everything will need to be recalculated.
- The payouts should ideally take the form of warrants or options. Both can work, but check with a lawyer to figure out what’s best in your situation. (Link in comments explaining the difference.)
- No matter whether you use options or warrants you’ll need a separate legal agreement and will have to account for them on your cap table. This is a real cost and admin overhead, which you should factor into your calculations.
- If the investor is promising revenue growth, consider avoiding equity altogether and agree a revenue share instead.
How to tell a good advisor from bad.
Good advisors can make a meaningful difference to a startup's chances of success, but they're few and far between, and in my experience don't make a living out of it. One of my contacts recently suggested two simple rules to follow when appointing an advisor:
Rule 1: YOU search for an advisor, you don't let them find / pitch you.
Rule 2: use your network, they'll vouch for an advisor in detail. Else run.