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- ♞ Understanding advisory shares
Today, I want to discuss a topic that has been raised by many readers: advisory shares. Specifically, I want to discuss how much you should consider giving away, how many advisors you should consider having, and how advisory shares can impact your fundraising efforts.
Everyone will give you all slightly different information, but here is my ideal structure for a company’s advisory shares.
Standard
Total Advisory Shares: 3.5%
Industry Advisor: 0.5%
Operations/Personal Advisor: 0.5%
Fundraising Advisor: 0.5%
Tier 1 Advisor: 2%
Alternative
This alternative approach provides a warrant instead of giving equity. Why should you consider this? Because the advisors don’t get any direct equity until they execute the warranted (after 10 years or when there is an exit). They also get much less because they aren’t subject to dilution if you promise a % of the company. This approach can help you preserve control and equity. If you exit at a lower valuation (after less dilution), then you likely end up making more money as well; if you make it big and go to an IPO, then you likely end up giving up a little more to your advisors but had a smoother journey getting there.
Total Advisory Shares: 0.5%
Industry Advisor: 0.1%
Operations/Personal Advisor: 0.1%
Fundraising Advisor: 0.1%
Tier 1 Advisor: 0.2%
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Warrants Explained
If you want to go with the second approach, the difference is that instead of giving away 0.5% today, you sign a warrant that says that the advisor can purchase 0.1% of the outstanding shares in the company for $1. An advisor might prefer this as it is more tax-friendly for them. You prefer this because you keep that 0.5% of equity for yourself. It might seem small, but an additional 2.5% can be the difference between keeping or losing control of the company in a funding round.
Trial Runs
I highly recommend that you have a trial run before you hire any advisor. I don’t accept any clients without them first purchasing a Strategy Call. I’m aware that many people willing to pay $25k+ for my services are turned off because I won’t even consider helping them long-term until they pay me $500 for 1 hour of consulting. Still, given the demand for my services and the fact that I take payment in equity + cash, I want to ensure we are a good fit before I move forward. That 1hr is a chance for me to see if you are the type of client I want and for you to see how I can help you. I recommend doing something similar with all advisors. It can be as short as a 1hr consulting or as long as a few months; pay a bit out of pocket and get a test run before you give them equity and are stuck with them forever.
Mistakes To Avoid
Don’t set a high anchor point. Some advisors might be worth 2-5% of your company if that is the case structure this creatively. What you don’t want to do is to set up a standard advisory agreement for 2-5% and then have that as the anchor when you are negotiating with your next advisor. People talk and if you give one advisor 5% and the other 0.1% then you’ll alienate them both. Creative structuring means using non-dilutive warrants to drop the % or giving equity + cash payment that is converted into a SAFE. Find a way of making it fair.
Know the Trends
The amount of equity that advisors receive tends to change based on the strength of the market. If you look at data from 2021-2023, you will see that most advisors took 0.25%. That just isn’t the case today and I’m seeing companies at 0.5% as their baseline. But this could change in the coming months and drop back down.
Who is a Tier 1 Advisor
A tier 1 advisor is someone who genuinely will make a massive difference to your company, think Mark Cuban.
Do you have an advisor in your company? |
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