Startup Advisor Equity

To run a business successfully, you need extensive know-how in your field of interest. In some cases, you may be lucky to find the expertise you require within yourself and your core team. But there will come a time when you may need to reach out for expert opinions from knowledgeable persons outside your existing team. That's where business advisors for startups come in. 

Unlike business mentors who might offer such advice at no cost, startup advisors seldom impart such substantial wisdom for free. They require some form of compensation. And in most cases, cash isn’t part of the deal. They prefer a share of the company in the form of advisory equity.

So, what exactly is startup advisor equity? As the name implies, advisors get these shares in exchange for business counsel, contacts, and insight. The equity you offer will depend on factors such as the advisor’s role, expertise, and duration of the agreement. 

Who Gets Advisory Equity?

It's easier to take your new business to greater heights if you have the proper counsel. Who better to give you sound advice than someone who's walked that path before and did very well? 

It's not unusual for entrepreneurs to seek the guidance of business advisors regarding how to grow their businesses. Having a startup advisor on board will help you navigate specific business barriers you ordinarily couldn't without their advice and insight. 

Such advisors boast a wealth of knowledge that you can tap into and fill out experience gaps within your team. They can offer advice regarding different matters like technical, regulatory, or critical hire-related matters.

Unlike business mentors who act in an informal capacity, startup business advisors typically require compensation in the form of equity. However, they don't have any legal obligations or responsibilities to your company's board of directors. 

Such persons offer an advisory role more than anything else. You’ll need to go through a startup compensation guide and draft and sign contracts or agreements stipulating the roles they'll play. 

With that said, it's crucial to build your advisory board carefully. It's not about lining up your board with high-profile names only. The idea is to pick a panel that adds value, opens doors, and is the right fit for your business. 

What Is Advisory Equity?

After giving your business a lifeline of ways to elevate to the next level, you'll need to reward the advisors. They require compensation in the form of equity, making it a win-win scenario for startups short on cash. 

Advisory equity is a type of stock option reserved for your business advisors. It helps maintain mutual interests between the parties involved, and startups usually offer these shares in exchange for financing. 

There's a need to create a balance between expertise and financial resources, begging the question — how much equity should you offer advisors?

How Much To Offer In Advisor Equity?

How much advisor equity you offer depends on the advisors’ role, contract duration, and whether it's a group of advisors or an individual advisor. As a general rule of thumb, expect a group of advisors to require up to 5% of your company's equity. However, for an individual advisor, expect to part with anything between 0.25 to 1% of your company's equity. 

If the advisor contributes significantly to your company's growth, they have every right to receive 1% for their efforts. If the advisor only attends monthly meetings, they can get 0.25%. 

The percentage involved also depends on the development stage of your business. For instance, if your company is still in the beginning phases, like the idea stage, you can afford to offer 0.25%. Cut the amount down to 0.15% if it's in the growth phase.  

Final Thoughts

Having a team of experienced advisors on board is crucial for any business looking to scale to greater heights. But before you give equity to an advisor, make sure that their contribution is worth it. That means you should choose the right business advisors from the get-go. 

Also, consider your financial position before committing to a percentage. Will your business generate enough revenue to pay the advisors without any problems? If not, consider drafting an equity agreement stating how you'll pay them. 

Above all, do your homework first before offering advisory shares. Look for a financial advisor if you have to. Once you have all your ducks in a row, sit back and watch your business flourish.