Maximizing the Value of Advisor Shares: An Essential Guide

Maximizing the Value of Advisor Shares: An Essential Guide

Introduction:

When it comes to building a successful company, having the right advisors on board can make all the difference. Just like you have a vesting schedule for yourself and your employees, implementing a vesting schedule for advisors is crucial. It not only ensures that advisors have a vested interest in the company's success, but it also sends a valuable signal to future investors. In this article, we will explore the key considerations when setting up advisor shares and provide actionable advice for maximizing their value.

Choosing the Right Advisors:

Selecting the right advisors is a critical step in building a successful company. While advisors can provide invaluable guidance and expertise, the wrong advisor can be a distraction or even a liability. Therefore, it's important to choose advisors like you would choose a co-founder. Look for individuals who complement your weaknesses and bring unique perspectives to the table. By aligning their expertise with your company's needs, you can enhance your chances of success.

Establishing the Advisor Relationship:

Before promising equity to advisors, it's essential to consider alternative options. One approach is to ask potential advisors if they would be willing to invest directly in your company instead of taking equity. By doing so, they have more skin in the game and demonstrate their commitment to your company's growth. This approach can also serve as a valuable signal to future investors, showcasing the confidence your advisors have in your business.

Formalizing the Agreement:

Once you have identified the right advisor and established mutual interest, it's crucial to formalize the relationship through a signed agreement. This agreement should clearly outline the advisor's domain of expertise, the specific areas they will assist you with, and the compensation they will receive. If equity is involved, it is highly recommended to seek legal advice and work closely with your potential advisor to ensure a fair and mutually beneficial agreement.

Designing the Vesting Schedule:

When it comes to advisor shares, designing an appropriate vesting schedule is essential. While there is no one-size-fits-all approach, it is generally advisable to avoid a four-year vesting schedule. Most advisors provide the majority of their value upfront, so a shorter vesting period may be more appropriate. Consider a two-year schedule with monthly vesting, allowing for regular compensation while ensuring the advisor's contributions are recognized and rewarded.

Determining Equity Allocation:

The percentage of equity allocated to advisors can vary depending on various factors, including their level of expertise, the nature of their involvement, and the stage of your company. In our research, we analyzed advisor shares issued in 2019 for companies that raised under $2 million. We found that advisor RSAs (Restricted Stock Awards) ranged from 0.2% to 1% of the company, while advisor NSOs (Non-Qualified Stock Options) ranged from 0.1% to 0.5% of the company. It is important to consider these benchmarks and adjust them based on the unique circumstances of your business.

Actionable Advice:

1. Clearly define your expectations: Before engaging with an advisor, clearly outline what you hope to achieve through the partnership. Define the specific areas where you require guidance and expertise, ensuring alignment between your needs and the advisor's domain of expertise.

2. Regular communication and evaluation: Establish a cadence of communication with your advisor, setting clear expectations for interaction and feedback. Regularly evaluate the value the advisor brings to your company, and reassess the relationship after a year or two to determine if it should continue.

3. Document the agreement: Regardless of the nature of compensation, it is crucial to document the advisor agreement. This ensures clarity and prevents any potential disputes or misunderstandings in the future. Work with a lawyer to develop a comprehensive agreement that safeguards the interests of both parties.

Conclusion:

Advisors play a crucial role in the success of a company, and properly structuring their shares is essential. By carefully selecting the right advisors, formalizing the relationship, and designing an appropriate vesting schedule, you can maximize the value of advisor shares. Remember to document the agreement and regularly evaluate the advisor's contributions to ensure a mutually beneficial partnership. With these strategies in place, you can leverage the expertise and guidance of advisors to propel your company towards success.