How Much Equity Should Founders Give Advisors?
How to use the Travis Kalanick method to create win-win value for your startup and your advisors
--
As a new startup founder, I had no idea how much to compensate advisors. As a result, I was slow to add them to our new startup’s team — which could have accelerated our growth. Advisors have played a key role in the success of many early-stage startups. For example, Sean Parker served as an early Facebook advisor. It was his introduction to the now legendary investor Peter Thiel that landed Facebook’s first check of $500,000.
When I did have an interest in adding an advisor I would often just blurt out a number or before the meeting quickly Google “How much equity should a founder give an advisor?”. I had a poor process and as a result, had poor outcomes. Here’s the framework I’ve started using to think about who should be advisors and how to compensate them.
Who should be an advisor
Ideally, everyone that has equity in your company should be an investor or employee. But, for certain people being an investor or employee doesn’t make sense because:
- They aren’t wealthy enough to be an investor
- They don’t have the time to be an employee
- They are helping for a specific reason like industry connections and employing them wouldn’t make sense
- But, you also want them more invested in your success than just paying them like a contractor
Why advisors should be compensated
High-caliber advisors are busy people with lots of optionality on how to spend their time. If they don’t put a premium on their time, then they probably aren’t a great advisor, to begin with.
To make it worth their while to spend time helping you and reaching into their rolodex, you should compensate them accordingly. Even if they offer to be an advisor for no compensation, they are much more likely to actually help if they have skin in the game. Equity compensation, in particular, creates alignment between their actions and the company’s success. Since most startups are cash strapped, equity-based compensation is also the most practical.
