Advisor Startup Equity: What You Need to Know

Many founders in the growth stage focus on hiring for internal startup roles: technology, marketing, product management, business development, etc. However, it’s just as important to find a knowledgeable and experienced startup advisor who can provide valuable guidance and insights.

While advisors are often eager to share their expertise, it’s customary to offer some kind of compensation, often in the form of advisor startup equity.  So how much are startup advisors paid for their work, and what should you know about the topic of startup advisor compensation? We’ll discuss all of these issues below.

What is a startup advisor?

A startup advisor is an individual who draws on their previous business or industry experience to provide assistance to early-stage startups. This assistance may come in the form of product research and development, mentorship, networking connections, or simply a fresh set of eyes.

Startup advisors are a welcome addition for startups looking to fill in gaps. They often possess traits that the startup founders themselves lack. This can include deep industry knowledge or a web of connections. Larger companies may even have a startup advisory board, with multiple advisors each bringing a crucial talent to the table.

Advisor compensation: cash or equity?

Unlike startup mentors, who typically occupy a more informal, unpaid role, startup advisors are usually compensated for their work. This leads to the next question: should startup advisors be paid in cash or equity in the business?

In most cases, advisors will receive equity compensation. This form of compensation is preferable for several reasons:

• Startups that are still growing (or even in the idea stage) typically have less cash to spend on salaries. Saving cash by offering startup advisor equity instead is usually a smart financial move.
• Employees at a startup often accept lower pay in exchange for a significant stake in the company. The stake can be sold in the event of a successful exit. Therefore, it makes sense to compensate advisors in the same fashion. In this way, their pay is based on the value that they bring to the business and tied to the startup’s success.
• Unlike employees or external consultants who are paid in cash, advisors generally don’t have predefined deliverables that they are required to provide. Instead, they offer counsel and insight on an as-needed basis. This role aligns better with equity compensation.

Advisors are usually paid in the form of advisory shares, which are usually issued as common stock (like the stock options that employees receive). These are options to buy shares, rather than the shares themselves, in order to simplify tax concerns. To encourage long-term advisor relationships, these shares are usually on a vesting schedule and paid out over time.

However, the vesting schedule for advisor shares is often shorter than that for employee shares. That’s because startups may go through multiple advisors as they grow and evolve. Additionally, many advisors provide most of their value early on in the partnership.

How much equity do startup advisors get?

Now that we’ve settled the issue of cash vs. equity for advisors, there’s one question left. How much equity should you pay your startup advisor?

The question of startup advisor equity is usually settled in a document such as a FAST Agreement (Founder/Advisor Standard Template). This agreement outlines the services that the advisor is expected to provide and the amount of equity the advisor will receive in exchange. It also includes other relevant information such as a termination clause or non-disclosure agreement.

Most commonly, startup advisors are paid with anywhere between 0.25 and 1 percent equity in the business. There are two main factors influencing the exact figure of startup advisor equity:

• The stage of the business: Early-stage startups typically have more equity to distribute to advisors since they’ve hired fewer employees. They also have more to gain from the advisors’ expertise. Cash-flush, later-stage startups (i.e. those that have passed through at least one fundraising round) may choose to offer less equity in exchange for more cash.
• The level of advisor engagement: Not all startup advisors are created equal. Some advisors simply hold monthly meetings. Others help with recruiting or product development. Some can introduce you to valuable contacts in the startup community. The more services that advisors provide for your business, the more equity they typically expect in return.

To learn more about startup roles, see if you qualify for membership to join Founders Network.