Considering giving shares to startup advisors? What should you know about advisory shares before you make your decision?
Giving shares to advisors has become very common for early-stage startups. It can provide great leverage in making great progress on your journey.
Of course, any wise founder should do their homework on what a reasonable amount of equity is to offer in this situation, the value they should expect in return, and understand the basics of how these shares work. Plus, who you should consider giving these types of shares to, and how to avoid any potential cons.
The Ultimate Guide To Pitch Decks
What Are Advisory Shares?
Advisory shares are shares of your stock, or equity, given to startup advisors.
This is instead of, or in tandem with, other types of compensation, salary, or consulting fees.
Making this trade-off can be essential for many ventures. If not, at least one of the first tasks which really makes everything else easier and more efficient.
If you haven’t given serious consideration to this strategy yet, or haven’t given it the time and priority it deserves, it may be the key to clearing the roadblocks you have been facing. As well as, making important leaps that can make the entire mission possible.
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Why Give Shares To Startup Advisors?
There are a variety of reasons that startups eagerly look to recruit advisors in exchange for shares in their companies.
These are some of the most obvious.
Most early-stage startups do not have huge budgets. Especially when they are eager to spend on people and advice. Even if that is truly where the best value for money can be found. There are plenty of other startup costs, even aside from building your product, or fundraising.
Successful individuals in the startup ecosystem love to help. Though their time is clearly in high demand, and highly valuable. Giving equity is a way to afford them, without having to fork over big consulting fees, or hourly compensation and benefits. You can imagine what Mark Cuban could charge for just an hour of his time.
Of course, your startup advisors still need to believe in what you are doing, the value of it, that it really has legs, that you are going to be coachable, and let them bring their value.
At the outset of a new venture giving away advisory shares really doesn’t cost you anything. They have little, or perhaps even no, tangible value to you. Yet, they can become enormously valuable.
Experts With A Vested Interest In Your Success
This is a strategy to not only get vital and impactful advice to guide your startup, but also to enroll experts and personalities with a vested interest in your success.
The more successful your company becomes, and the more value they help create in it, the greater the reward for them. As such, it is a great way to create alignment in motivations and actions.
They can become some of your most powerful brand ambassadors, as well as really bring direct tangible value in addition to their advice and input.
One of the big reasons that startup entrepreneurs dive into this topic so early is that having credible advisors in your pitch deck can make all the difference in getting funded.
This is aside from the fact that they may be providing hugely important introductions and recommendations to investors, and paving the way to more yeses.
The team is everything in fundraising. Especially in the early stages. Yet, most first-time startup entrepreneurs do not have the strengths or resumes that investors are looking to fund. Their founding teams alone do not cover all of the essential skill sets required to make a successful business.
Giving out advisory shares and being able to instantly upgrade your team, and advisors slide in your pitch deck can make night and day difference in getting funded, who will fund you, and how much.
It will even make a difference in who you are able to hire as employees or recruit as on-demand outsourced help to get through the next steps of your journey.
Having great advisors to lean on and learn from can certainly help your venture go so much faster. They can help you make those critical leaps in credibility and visibility. As well as helping to keep you focused on the most important priorities to make progress and go fast.
This is not just for boosting your ego and making you feel good about how your business is going. That hypergrowth is essential. Not only to hit the mass many companies require to be viable, but to attract funding and investors, to gain and retain the best talent, and to stay ahead of the competition.
Great startup advisors can absolutely help you go bigger. Not just in terms of helping to speed up your growth, but also in terms of the sheer size of what’s possible for your idea and venture.
Experienced advisors can have an eagle-eye view, and may see possibilities far bigger than you have imagined for your company. They know how to connect the dots.
They will also likely have the connections to make that possible. Whether that is investors, vendors, distributors, or M&A deals. Offering advisory shares could ensure that you have the best professionals working for you.
Avoiding Mistakes & Reducing Risk
Knowing what to do is only half the battle on the startup journey. Maybe even less than that. What is far more impactful, and will make all the difference in speed, size, and success versus failure is knowing what not to do.
This is where experienced startup advisors can really help you leap over the pitfalls and keep going in the right direction, without all the missteps and unnecessary mistakes.
It’s what you don’t know that really messes you up. The only way to avoid that is to have those that have been there before to guide you and teach you.
How Much Equity Should You Give To Startup Advisors?
The amount of equity in your company that you may give to startup advisors can vary widely.
0.25% to 1% appears to be quite common. That is per advisor. Though you may also want to give out more advisory shares in some circumstances.
Factors to consider in this equation include:
- The stage of your startup
- How much your shares are currently worth
- Your expectation of the increase in value of those shares during their term with you
- How much time and work do you expect them to commit
- The value you expect to generate or receive with them as advisors for your startup
- How badly do you want to secure specific advisors
- What other shareholders and current board members will agree to
Is It Worth It?
Whether giving out advisory shares really pans out to be worth it, and how valuable this arrangement is, will vary depending on who you bring in, how you structure the agreement and advisory shares, and how much value you extract from them.
This can include:
- The specific investors you bring in
- The credibility and authority they add
- The network they have, and open up for you
- The unique experience they can bring to the table
- The quality of the advice they provide for your startup
- How available they make themselves to you
- The financial advantages of giving them equity versus other compensation in terms of cash flow, and a salary or other compensation
Startup Advisors Vs. Mentors Vs. Consultants
Startup advisors can be very much like other mentors and consultants.
One of the main differences, and what makes them more like your equity investors and board members is that those startup advisors you give equity are shareholders in your business, their general interests are aligned with yours, and they are a part of your business.
A mentor is more of a casual relationship. There is nothing really tying you together. Though their advice and guidance can be just as important. Though they are not going to add the value that having an official advisor in your pitch deck and on your website will provide.
Consultants are more like mentors, except you pay them. Mentors generally don’t charge you. At least not more than the price of lunch or coffee. Startup consultants are generally more transactional in nature. You are trading cash for a specific benefit or service. Which may be fundraising, overcoming specific business problems, or developing a go-to-market or marketing plan. Consultants may charge hourly or flat fees or success fees.
When working out the advisory shares to give to your startup advisors, be mindful of the valuable assistance they can provide when raising funding for your new venture. Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
The Potential Downsides Of Giving Advisory Shares
The one big fear or risk in regards to giving shares to advisors, or employees, or anyone else for that matter, is that they are not going to provide a fair amount of value. You don’t want to lose money.
These are people who are joining your cap table, and who will be on it forever unless they sell the advisory shares or you buy them back. Be sure they are people you want onboard for the long term.
Dilution may be a fear for some. Too much dilution can be a bad thing. Yet, if you are choosing your advisors well, you probably have everything to gain, and really nothing to lose.
The biggest risk is that they don’t stay, keep offering value, and end up reaping a windfall when your company becomes worth billions of dollars. It may not be much to lose, but no one likes giving away their company for free.
Crafting clear written agreements can help avoid this. As can just being sure, you are smart and careful in picking the right people. Vesting schedules also help back this up and ensure it. For example, not having those shares ‘vest’ or transfer to them for a year or two, once they’ve proven to show up and help.
Giving advisory shares to bring in startup advisory can be one of the best moves that entrepreneurs can make.
It is easily one of the easiest, most efficient, and most cost-effective levers that are right at your fingertips. Which can also make all the difference in speed, size, funding, and the amount of stress as you are on this journey.
Understanding how they work, who makes great startup advisors who are really worth the investment, and how to best structure advisory shares and arrangements is important.
It can impact your cap table and all of those factors that circle that. Yet, structured well, with the right startup advisors can help you overcome hurdles, and launch your venture forward to successes you may not have even thought possible.
Understand how advisory shares work, do the math on the returns and pick great startup advisors that will move the needle for your company.
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