September 5, 2017
You might be contemplating how much equity should you give early team members including mentors, advisors, board members and potential cofounders in your startup.
I’ve personally had challenges on this front and find it an area that benefits from experience (read as mistakes). I know I’ve both over-asked for equity in early days as well as been promised equity that never materialized and was forgotten after the company was sold. Neither was right and I don’t think either was nefarious. Here are some ranges regarding the formation and early stages of the company of what you should expect to ask for or offer to various individuals.
And remember, value is created when you build and grow a company – not when you found a company.
Mentorship is free – or at least should be. Mentorship is something you do to give back to your community. Yes, there are people that use it to sell their services – but you’ll discover them soon enough. You should plan on buying the lunch/coffee/beverage.
One way to pay for mentorship is simple: pay it forward. Are you currently mentoring someone coming up behind you? Do they look different than you? The answer to both questions should be yes. You can always find someone that needs help who is a “couple of chapters behind you in the book.” What skill set do you have that you could mentor?
The point about not looking like you may seem simple – but the comment is about being intentional. Selection bias and our own networks tend to keep us insular. Branch out. Here’s a great article on Men who Mentor Women at HBR.
If you find that you’ve met with a specific mentor on a recurring basis – don’t take the relationship for granted, make it more formal. Especially if mentors continue to show an interest and add value, consider moving them up the ladder to advisors. You want your company to survive and grow – it’s good to have aligned incentives. They may say no, and that’s okay, but the offer shows that you respect and value their time.
Advisors go from the informal mentors to a more formal and structured role that recognizes their contribution with compensation – usually equity.
Founder Institute did a great job putting together a matrix and Founder Advisory Standard Template (FAST) agreement, a five-page document that gets you to an agreement with equity assignment easily. The document is very straight forward, make two copies and fill in the blanks. You keep one copy and the advisor keeps one copy.
The table is broken into stage and roles. With roles come expectations for involvement. The more mature the organization and product, the less equity you will grant.
Keep in mind, the numbers listed above don’t mean that you will get an advisor or an experienced advisor for that minor percentage. The Advisor should decide what makes it worth their time and how much time/knowledge/effort they are willing to provide.
I know you’re excited about your idea, but that doesn’t mean they will be excited about it for any percentage that begins with the phrase BPS vs percentage of equity.
You could pay a couple of points for an advisory board member with the right experience.
To maximize the value of advisory board members, I’d recommend that you establish a quarterly meeting. It serves the forcing function of driving you to deadlines – also, it reminds you of what you promised last quarter and if you’re delivering on it this quarter.
Board members take an entirely different level of formality, primarily because of the fiduciary responsibility they sign up for the company – this duty isn’t cavalier and I would be careful asking someone to join your board too early. First, test advisory board members for a season – see if they continue to add value and the need for a formal board is there (maturity of the company, progress toward traction, etc).
Board compensation can be in equity, cash or blended. Independent board members need to be compensated – venture board members are being paid by the firm to watch their money in your deal so don’t generally expect compensation – other than travel.
Depending on the stage and need of the company, it’s between two to five percent. If you’re really early stage, haven’t raised capital and need the name on your deck/website to help raise the cash, it will likely be at two to three percent. Is it worth it? Well, if you can get to your end game faster the answer is likely yes.
If you’re looking for someone to join your team early and help grow the company, this looks more like a cofounder. The distinction here is how much time and effort do you expect the person to contribute and for how long?
The Foundrs site is a great calculator for contribution. It’s expensive to unravel these expectations in a year so do it now.
Specific advice on cofounders:
Don’t be cheap. If you have a first sales hire that can help grow the company, set milestones with the stock grants based on hitting revenue milestones.
Don’t be naïve. the entire point of the post is to help you understand the range of what you should pay and not pay to get work done. If you’re looking for a project deliverable, you can calculate the number of hours required, multiplied by the market (or discounted) rates and provide some sort of options to the contractor or vendor.
If you’re expecting overlapping roles for the above, make sure you have those roles outlined in advance so everyone has a clear understanding of the expectations.
All of these roles have vesting schedules and strike prices for the stock. If the individual isn’t performing – let them go and put the stock to better use with the right role. It won’t get better.
One of my board members in my first company told me emphatically that you hire professionals to do legal and banking work. What he meant was that you shouldn’t try to be your own lawyer. You can project manage your lawyer to keep the cost down, but don’t pretend you are a lawyer. I’ve spent a lot of money on legal over the years and I’m comfortable reviewing basic docs as the initial process review, however, that doesn’t take the place of the final legal review.
You will pay a premium rate for a premium attorney. However, you can set fixed fees for projects, it’s amazing how the expense will cap at the fee.
For Bankers, you can expect to spend 7-10 percent of the transaction fee. Some bankers will want a retainer. Generally, I’d say no to that retainer and put it as a success fee only, but your circumstances will dictate. You might split that fee between cash and stock. But it’s not 10 percent on cash raised plus equity.
Finally, keep in mind you want a real banker – someone with a license (at least in most states). Not someone that says they will help you raise for a fee. Run away from those people.
Read more advice about capital and your startup team at TechCo
This article is courtesy of Techstars, the best global ecosystem for entrepreneurs to bring new technologies to market. From inspiration to IPO, Techstars empowers the world’s most promising entrepreneurs throughout their lifelong journey by providing a global ecosystem made up of tens of thousands of community leaders, founders, mentors, investors, and corporate partners.
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