I hear of a lot of startups building their advisory board with industry experts and I'm just curious what this arrangement would look like?
I've had many "Advisors" over the years and I like to break them up into 2 groups.
1) Formal Advisors
These are people who strategic insights into the business and would create value for the company by having them listed on our site, and have access to them in an ongoing way. I typically engage them well before anything formal to see if they would actually be helpful and that we both get along.
Compensation is usually around 0.1% - 0.5% ... if the person is amazing and will also help with the fundraising process, then I would go as high as 1%.
2) Personal Advisors
These are people who I turn to for specific advice around tactics and strategy on an infrequent basis (maybe once or twice a year). Things like SEO, Internationalization, etc ... I typically try to create value for them every time we chat, so that it's win/win and I don't compensate with equity.
I've personally never paid for formal advice, although I do often via Clarity .. but that's different.
The great thing about Clarity is I can avoid spending the time or equity to get similar quality advice in usually a faster time period, however both approaches (list above vs. using Clarity) are totally different affinities to the person and the company.
Call if you need more.
I am a member of several startup and early-stage company advisory boards. As with many areas of life and business, there are not strict guidelines or standards, and the arrangements can vary widely. Factors include the type of company (and perceived potential value of the equity), the experience and / or prominence of the advisors (i.e. are they just bringing knowledge / expertise, or do they also add "clout" and open up a lot of doors?), and how early in the company a particular advisor gets involved.
However, a lot of "typical" deals for early stage companies involve .5% to 1% of equity (which vests over a year or two) in exchange for 2-5 hours a month of involvement over that period.
Many of the companies I've advised have come out of a startup accelerator program, which sets the structure of the advisor-for-equity relationship. In those cases, the entrepreneurs are giving up a total of 6% of their equity to both go through the accelerator (which also includes some seed funding) and to come out with a small board of advisors.
Compensating an advisor can take a variety of directions. It is always best to have an agreement with an advisory board member...even if it a one-pager outlining the roles & responsibilities of the Advisor and the firm. Popular compensation models:
1. Equity - in the form of warrants that vest over time...allows time to show that the Advisor can add value. Generally 1% or less.
2. Compensation - A fee that is based on per meeting or other event...again based on some value-add activity.
3. Mentorship - Some individuals do just want to provide advice...would still be clear about the role they play as free advice may or may not be helpful.
4. Angel Investor - A number of angels making an investment in your firm will be interested in being an advisory board member.
5. Regardless, you should compensate the individual for reasonable travel expenses for meetings and business development .
Selecting and compensating an Advisory Board member is the same process as selecting and any one on your team - handle it with care and respect!
