On Advisors & Equity

Never give away equity to advisors. Free doesn’t look good to anyone, it also doesn’t work.

Let me provide some context. Entrepreneurs often believe that they can build credibility and get significant added value by bringing in more experienced partners, under the title of advisor. It is typical for such a title to be accompanied by some equity, in exchange of time that the advisor may spend with the company, or publicly using her name for various purposes. No matter what the equity range is (typically in the low single digits, or even less), I think this is wrong; here’s why.

Truly experienced and credible people –more often than not– have made some money throughout their career. This is also a testament to their track record so far, if not anything else. Now, if one can afford to pay for it, her money comes cheaper than her time. In other words, she would prefer to invest and act as an angel, rather than as an advisor per se. In this case, the interests are aligned and advice comes naturally, plus the company gets some cash.

What happens if the angel is able but not willing to invest though? Many entrepreneurs think that offering some equity for free will do the trick and keep the advisor engaged. My humble experience suggests the opposite. Along with equity also comes some hassle, from signing a few docs to receiving periodic reports, while any expected returns are much later down the road. While the incentives may be right, such issues more often than not consume the relationship, putting its very purpose at risk.

Before anything else, it is important to understand the incentives of a mentor that a founder wants to turn to an advisor. Chances are that already successful people do not expect to make a fortune out of a company they advise. If they would like to, they would invest; since they can but they don’t, their drive is different.

What they really want to, I’d argue, is to relate with people facing interesting problems. Getting exposure to a startup’s struggle is a breath of fresh air to anyone who has experienced anything similar before. The absurdly difficult problem of creating a team, a product, a business and eventually a company is intellectually stimulating in a particular way. A founder probably doesn’t need to look further; in the good cases there is a genuine willingness from the interested party to help and this is the actual driver of such a relationship.

The above suggests that anything that gets in the way of this interaction should be eliminated; money, documents, making it public or other commitments do not contribute to it. All these may well occur a little later down the road. Still, it is much better to let a growing engagement come up organically, rather than push for any of the above from early on.

After all, if someone is willing to help, she will. No mention in the company website is required for someone to make an intro. No number of shares will make an advisor interested in a company she is not. And no “board of advisors” has ever convened to save a startup from extinction; coaching sessions better work on an one-on-one basis after all.

What’s more, experienced observers well understand that the badge of advisor is a celebrated way to communicate the failure of broader engagement, for example as an angel or a part time partner. Even when the latter is the case, i.e. the startup cannot afford or convince a valuable person to join its team, I believe there are more straightforward ways to compensate her (e.g. commission) and communicate her actual engagement (e.g. external partner) that lack any negative effects and connotation.

All in all, equity is a special, almost sacred asset that founders may put in good use for a dual purpose: To either motivate employees who are fully committed to the company and who they can hire and fire at will, or give to investors who enable the founders to do just that. Everything else more often than not falls short of expectations, and I hope this post makes the case clear.

  • Ali Hamed

    Probably like most things–there isn’t one rule IMO. I’ve had people come on as advisors who are very illiquid because of the lifecycle of their companies. But a lot of them hustle a lot harder to help because they have “not made it.” I also think that bringing someone on as an advisor with a very specific job to do is a great way to job interview someone as a senior hire. Most of our companies bring their future CTO’s on as “tech advisors” first. they get .25% equity that vests once they take bi-weekly calls to lead sprint meetings, help with tech architecture etc. If it goes well, they come on full time, if they don’t… then only .25% lost to a senior engineer who may help them recruit engineers down the road.

    I’ve seen it totally not work though and get the pt of the article. Especially when wealthy angels don’t invest but are advisors… it’s just a bad signal.

  • https://twitter.com/pablovenice Paul

    Great points with regard to advisors whose primary role is mentoring a less experienced founder. In general I think these folks should be intrinsically motivated. But there are other types of advisors where the same rules may not apply. Ali brings up a great example with tech advisors. Another would be domain-specific advisors. Let’s say you’re doing a fitness app and you need ongoing advice about how to motivate users via the UX. You’re not an expert in behavioral psychology so you bring on an advisor, a clinician who can’t afford to take time off without some form of comp.

  • http://www.sunstonecommunication.com Kenny Fraser

    Very good article. I mentor and do some angel investing and agree with your view for most cases. I tend only to invest where I can actively help the company. I also take the points made below for specific cases but in general spot on.

  • http://gtziralis.com George Tziralis

    Ali, thank you for your comment. I see where you stand and how this can work. Personally, however, I’d prefer not to give away any amount of equity before, for example, the senior engineer will join the company as CTO. I think that –in principle– the promise of recruiting as a technical lead should be sufficient enough for one to work a couple of hours every couple of weeks, say for a couple of months, before both parties become comfortable that working together will work both ways. A long cliff period in her vesting will probably mean the same, yet I prefer more straightforward solutions.

  • http://gtziralis.com George Tziralis

    Paul, thank you for your comment, I understand your point. In the fitness app example, you suggest that the startup will pay with equity an external consultant it cannot afford. On my behalf, I’d recommend that you’d compensate the expert with a symbolic monetary amount and a promise for a much higher one if things work out down the road (otherwise, equity also won’t pay off anyway).

  • http://gtziralis.com George Tziralis

    Thank you Kenny.

  • https://twitter.com/pablovenice Paul

    Great idea, . Let’s put this into concrete terms. By “symbolic amount” I assume you mean a token payment. What would you suggest for a psychologist who makes $150K per year? Here’s my thought: allow them to bill at their full rate, but on a deferred basis. The note would be contingent on a qualifying raise (e.g. series A). And give them a kicker if the company makes it to series B.

  • http://gtziralis.com George Tziralis

    For example, yes. I believe that one can figure out the details if the structure is right in principle.

  • https://mist.io/ Chris Psaltis

    Good points on advisors, very interesting post.

    Advisors should not be treated as a marketing stunt. You must get real value and a lot of it. By value I mean their money and personal time. If you can get both that’s great and definitely if someone is able to invest but prefers to get free equity it’s a bad sign.

    The important thing here though is personal time. Small amounts of angel investments can’t substitute years of experience, domain knowledge and personal network. You don’t have to get equity to help, but to engage deeply with a team you certainly have to.

    The trick here, which you omit in your post, is vesting. Investors don’t have any and you can’t be sure that an investor will dedicate his time besides his money. On the other hand advisors’ equity is always under a vesting schedule. You think you don’t get enough? You can simply stop the collaboration and no big harm is done.

  • http://gtziralis.com George Tziralis

    Chris, thank you for your comment. Of course, vesting should be in place for non-investors. That said, I’m not sure it changes the picture anyway. The principle remains the same and, no matter the number of shares one is been granted, my view is that the above mentioned issues remain.

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