In the early stages, bringing on advisors can help you navigate a novel industry, make introductions, raise capital, hire employees, and bring you credibility that you don’t yet have. Seek advisors out and do your best to leverage as much of their knowledge, network, and credibility as possible. But while it’s often easy to identify strong advisors, it can often be trickier to understand how best to align incentives with them and actually get them on board.
Aligning incentives
Advisors run the gamut — subject matter experts that have long, tenured careers in your industry, startup executives that have already been through the stage you’re now facing, promotional figures, etc. While their wide-ranging backgrounds of those individuals can make them so valuable for you and your business, it also tends to mean they can have extremely varied levels of understanding on the economics associated with venture-backed company building and how advisors are typically compensated. Below we provide a framework to consider in helping bridge that gap and close the deal with would-be advisors.
- Understand what will motivate them - While the role you want them to play may be clear, whether it will tick their motivational boxes can be less clear. Identify which of the following are important for them to receive through an advisory engagement:
- Notoriety from association with a leading venture-backed startup;
- Enjoyment just from being involved;
- Personal connection to you;
- Investment opportunity;
- Cash; or
- Stock option grants.
- Close the gap on startup economics - Make sure they really understand how startup valuations work and how stock options work, just the same way you would a prospective candidate in your hiring funnel. Often times, corporate professionals with 20+ years work experience may not really understand startup math but may not want to admit that to you — they’re used to knowing everything about everything — so give them a primer unless you’re sure they are familiar.
- Benchmark your stock option grants - Typically, advisors are compensated with equity grants that range from 0.1% to 1%. The median equity grant for an advisory board member is 0.25% and is generally what a knowledgeable startup advisor would consider “fair,” but again that’s just a rule of thumb. Typically, advisory grants vest over 2-years with no cliff (different from your 4 year + 1 year cliff employee grants).
- Get them to invest - This is the single best way to align incentives and it has the added benefit of sending a strong signal to future investors. If the advisor you’re courting has already built significant personal assets (e.g., a CEO of a public company that you’ve turned into your super fan), consider how you can entice them to invest in your company as part of the advisory engagement.
One of the best ways to incentivize an investment from an advisor to truly align incentives is to offer them additional advisory shares or options on top of the shares they buy with their investment capital. This effectively “buys down” the valuation of their investment, giving them a more attractive entry point than other investors.
References
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