The Growing Importance of Artificial Intelligence and Advisor Shares in Business

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Aug 01, 2023
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The Growing Importance of Artificial Intelligence and Advisor Shares in Business
Introduction:
As the world continues to advance technologically, the importance of artificial intelligence (AI) solutions is becoming increasingly evident. According to a new IDC Spending Guide, spending on AI solutions in the United States is projected to double by 2025, reaching a staggering $120 billion. This growth represents a compound annual growth rate (CAGR) of 26.0% over the forecast period of 2021-2025. The retail industry is expected to lead the AI spending in the US, followed closely by the banking sector. However, other industries, such as professional services, media, and securities and investment services, are also set to experience significant growth in AI spending.
Connecting AI and Advisor Shares:
While AI is transforming businesses across industries, it is equally important for entrepreneurs and founders to consider the role of advisor shares in their company's growth. Advisor shares, often granted to individuals who provide guidance and expertise, can greatly impact a company's success. Establishing a vesting schedule for advisors, similar to that of employees, is crucial. These agreements typically span two years, with monthly vesting and no cliff. However, before offering equity, it is advisable to gauge if a potential advisor would be willing to invest in the company instead. By investing directly, advisors demonstrate a deeper commitment and send a positive signal to future investors.
Choosing the Right Advisors:
Selecting the right advisors is essential for maximizing their potential contribution to your company. Advisors should be chosen with the same level of care as co-founders, as they can either be instrumental to your success or a hindrance. Different types of advisors serve distinct purposes. Some advisors provide value through association, while others act as sounding boards for ideas and decisions. It is not uncommon for advisors to consider investing their own money in the company during future financing rounds. It is important to identify what you need in an advisor and establish a clear agreement that outlines the advisor's domain of expertise, the areas they will assist with, and the compensation they will receive.
Documenting Advisor Agreements:
When equity is involved or promised, it is crucial to document the advisor agreement. Seeking legal counsel and working closely with the potential advisor to create an agreement that benefits all parties is recommended. The agreement should clearly outline the advisor's responsibilities, the percentage of equity (if any) they will receive, and any other forms of compensation. By formalizing the relationship, both the founder and the advisor can align their expectations and work towards shared goals. Founders play a crucial role in driving the communication cadence with advisors, building agendas, and setting expectations.
Advisor Share Percentages:
The allocation of advisor shares is a significant consideration. Advisor Restricted Stock Awards (RSAs) typically range from 0.2% to 1% of a company, while Non-Qualified Stock Options (NSOs) fall between 0.1% to 0.5%. The earlier an advisor joins a company, the higher the fully-diluted amount they are usually granted. It is advisable to avoid a four-year vesting schedule for advisors, as their value is often delivered upfront. Re-evaluating the relationship after a year or two allows for adjustments based on performance and alignment of objectives.
Actionable Advice:
- 1. Prioritize AI Investment: With the projected growth of AI spending in the US, businesses should assess their industry's potential for AI implementation and allocate resources accordingly. Investing in AI solutions can enhance efficiency, improve customer experiences, and drive innovation.
- 2. Choose Advisors Strategically: When selecting advisors, consider their expertise and how they can complement your weaknesses as a founder. Look for individuals who not only provide guidance but also align with your company's values and long-term vision.
- 3. Formalize Advisor Agreements: Establish clear agreements with advisors, outlining their responsibilities, compensation, and any equity involvement. By formalizing the relationship, both parties can work collaboratively towards shared goals while managing expectations.
Conclusion:
As the demand for AI solutions continues to grow, businesses must not overlook the importance of advisor shares. By strategically selecting advisors and formalizing agreements, entrepreneurs can leverage their expertise to navigate challenges, drive growth, and enhance the overall success of their ventures. With the right combination of AI and advisor support, businesses can position themselves for long-term success in an increasingly competitive landscape.
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