Everything you ever wanted to know about advisors, Part 2 – Venture Hacks

Everything you ever wanted to know about advisors, Part 2 – Venture Hacks

7.5 What should I pay advisors if they won’t invest?

Advisors are not paid by the hour—they’re paid for results. They’re not paid for their inputs—they’re paid for their outputs. If an advisor can uncork a million dollars of your company’s latent value with 15 minutes of conversation or a single introduction, you should pay him appropriately.

There are roughly two types of advisors—we’ll call them the normal advisor and the super advisor.

Normal advisors

The normal advisor gets 0.1%-0.25% of a company’s post-Series A stock. Normal advisors do something important for the company and aren’t expected to do much beyond that. For example, they introduce the company to a key customer or investor.

Normal advisors are also assembled by naive entrepreneurs who think the mere presence of an advisory board will create social proof and help them raise money. But investors don’t take these mock advisory boards seriously.

Super advisors

The super advisor can get as much stock as a board member: 1%-2% of a company’s post-Series A stock. Super advisors help make your company happen. They know all your prospective customers intimately. Or they raise your money for you. Or they bring you a handful of great employees. They can even add more value than an independent board member because they don’t have to deal with corporate governance.

If you find a super advisor, you want to incent him as much as possible and push him to help make the company happen. They can be much more effective than 5 or 10 normal advisors.

Most super advisors are unique and Y Combinator is a great example. YC takes about 6% of a company in return for $15K-$20K. Although most of their companies can survive with the small investment, the money is effectively meaningless—it’s an artifice. Most of their companies would probably give 6% of their shares to YC for free, just to participate in the program.

YC acts like a super advisor, not an investor—and YC makes their companies happen by helping develop the company’s product, introducing them to investors, and branding their companies.

Advisor compensation

Whether you’re hiring a normal advisor or super advisor:

Advisory shares are usually issued as common stock options.

The options typically vest monthly over 1-2 years with 100% single-trigger acceleration and no cliff. Although the advisor is on a vesting schedule, you should expect them to add most of their value up-front—that’s normal.

Many advisors want options they can exercise immediately—that’s fine.

If your company hasn’t raised a Series A, increase the advisor’s equity by roughly 30%-50% to account for dilution from seed investors, Series A investors, option pools, swimming pools, and the like.

via Everything you ever wanted to know about advisors, Part 2 – Venture Hacks.

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