I believe advisors (mentors) want to be involved with a company because of the following 3 reasons:
- They believe it will help them professionally (who does not want to brag that they were an advisor to the next Google)
- They believe it be a financial benefit (it is good to get a return for the time spent)
- They like the entrepreneurs or /and the idea or the space and want to help (either as a way to give back or to make a difference)
So what does an advisor bring to the table that warrants an entrepreneur to give up their precious stock? Advisors typically add value to a startup in the following 5 ways.
- They have industry knowledge (domain expertise), startup experience (help you avoid making simple mistakes)
- They can open doors to potential customers (contracts, connections, introductions, etc.)
- They can help hire potential recruits or vendors (hiring, consultant connections, vendor connections, etc.)
- They help introduce you to potential financing connections (for funding, equity or debt)
- They have gravitas (their association with your company, lends it credibility)
There are a couple of ways I have tried up come up with equity to give advisors in my previous companies.
One is to understand the value they bring – reputation, contacts – hence introductions, customers, follow-on financing, etc. and appropriately provide percentages of stock to them on that value.
Other is to treat them as a consultant (a very highly paid one) and put together the requirements of their time and deliverables, then understand their per hour rate, and finally give them equity that’s somewhat more than what they would get in cash at a big company, in equity, because of the risk.
In both scenarios, you have to account for the stage of the company (idea stage, you give more, growth stage, less).
There are some India specific issues that change the equation for equity to advisors, from the Founder Institute recommendations on TC a few months ago. The recommendations go from 0.25% to 1% at Idea stage to 0.1 to 0.6% at the growth stage. Please review the table on this post.
My personal “rule of thumb” for Indian companies, is to take Founder Institute percentages and bump them by 50%. Here’s why I make that recommendation:
First, there’s a dearth of quality advisors (or mentors) who have “been-there-done-that” (btdt) in India. Either because the ones that have BTDT don’t have time, or are unwilling to share their knowledge. So although the demand for quality advisors is high, the supply is very limited.
Second, exits are not as frequent or ones with very high valuations for Indian companies (purely anecdotal, I don’t have hard data to back this up) compared to those in US.
Third, the requirements of most Indian companies (in terms of time spent) are a lot more than ones abroad. This commitment and the expectation of time spent (or number connections made) is what I have heard most, as the reason many quality advisors are shying away from helping young entrepreneurs.
So, my suggestion is first understand what stage your company is at. Idea stage is obvious, startup stage is typically when you have raised a seed round and have a product, and finally growth stage is when you have significant revenues and have raised a series A (or B).
Then depending on what (all) you want the advisor to do, offer them 18 month or 24 month vesting on the stock at percentages that motivates them to do all it takes to get you to the next level. My recommendation is to give 0.4% to 1.5% at idea stage and 0.2% to 1% at growth stage.
Thanks to Ravi Trivedi for helping me think through this post.