Advisory Board compensation is an important consideration. How much is right? Does this change over time? Is there a vesting period?
Seeking Advisory Board Members who will help you grow your company? Maybe those you seek have backgrounds in areas in which your team has gaps. Maybe they have a deep reservoir of contacts helpful to your financing, strategic or marketing efforts. Some may provide challenges to your approaches to business in general, or to your market perspective.
Regardless, you seek quality individuals who will actively bring something of value to the table.
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With potential Advisory Board Members, like everything else in life, you get what you pay for.
To attract Advisors who will consistently support your efforts to grow your startup venture, it’s necessary to provide Advisory Board compensation. There is a theory that an Advisor does not require compensation. The fact of the matter is Advisors who are not seeking compensation are unlikely to be strong Advisors. Experienced, well connected, committed Advisors will usually expect compensation when their time is their most valuable resource.
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So how should you compensate them?
In a market-based economy, you provide compensation which is competitive in the marketplace. But how much is that? To answer this question you must consider the three principles of Advisor participation.
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The Quality of the Advisor
In our opinion, is the most important factor. The Advisor should be a leader in their field or discipline. This dimension includes their experience, their network, their willingness and time to engage, their enthusiasm for the endeavor, their fit with the team, and an ability to serve as a mentor for the venture leadership. It is imperative that the Advisor brings your team qualities it does not have, but needs. Such Advisors may include “C” level executives, leaders of colleges, universities, or widely recognized entrepreneurial programs, partner level players in the legal professions, and technical leaders in the fields of science and technology. However, even at this level, some Advisors may stand out. Consider Nick Saban or Steve Spurrier of college football, or “Coach K” of college basketball. Quality demands a price, and Advisory support is no different. A stronger Advisor will require a higher level of compensation.
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The Level of Engagement and Participation
While we believe an Angel Group or VC places little value on “marquis” names that are associated with a startup but don’t participate actively, the reality is that this is not uncommon. If your Advisor meets with your management team a few times a year, attends quarterly Advisory Board meetings and makes a few introductions on your behalf, they are more engaged than the “marquis” Advisory Board referenced above. However, they are not totally engaged at a level important to the company. Advisors who meet regularly with the management team and are engaged in its projects such as financing, strategy development, and marketing clearly provide the potential to add more value to the startup. These are Advisors who deserve higher levels of compensation.
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The Stage of Development
The final step. Generally speaking, earlier stage startups carry with them higher levels of risk. There is a lower chance that any time the Advisors spends on the endeavor will result in a payout to the Advisor. Additionally, as the startup grows and its markets develop, its value increases and the risks of failure decrease. As a result, the percentage of equity which is shared with Advisors for their engaged support decreases later on.
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So, how should your startups’ Advisory Board Member be compensated?
Stock options between 0.1% and 1.0% of company equity are typical for startups in the Concept and Seed stages of development. This could also apply to Early stage ventures. The awards are generally skewed to the upper side for higher quality Advisors whose level of participation is stronger.
As the venture grows and moves through the Growth stage into the Mezzanine stage, the top side of the range tends to decrease by 0.2% to 0.4%. However, those players at the very top of their fields like “Coach K”, stand in a league of their own. As such, negotiation with these players usually results in compensation well beyond the 0.1% to 1.0% referenced above. At that level, it’s all about supply and demand, and supply is low.
