The Guide to Advisor Shares and the Durability Formula for Startups

The Guide to Advisor Shares and the Durability Formula for Startups

Introduction:
When it comes to building a successful startup, two important aspects to consider are the allocation of advisor shares and designing for durability. In this article, we will explore the significance of vesting schedules for advisors and how to choose the right advisors for your company. Additionally, we will delve into the durability formula, which consists of network effects, economies of scale, brand, embedding, and intellectual property, and its role in determining the future value of a startup.

Vesting Schedules for Advisors:
Similar to vesting schedules for employees, having a vesting schedule for advisors is crucial. These agreements typically span two years, with monthly vesting and no cliff. However, before promising equity, it's worth considering if a potential advisor would be willing to invest directly in your company instead. This not only gives them more stake in the game but also sends a positive signal to future investors. When selecting advisors, it is important to treat the process as if you were choosing a co-founder. Advisors can play a critical role in a company's success, but they can also become distractions or liabilities if not chosen wisely.

Types of Advisors:
There are two main types of advisors to consider: the name advisor and the practical advisor. The name advisor brings value through association, while the practical advisor acts as a sounding board and offers expertise in areas where you may have weaknesses. It is not uncommon for advisors to invest their own money in future financing rounds, further solidifying their commitment to the company.

Establishing the Advisor Relationship:
Before formally establishing the relationship, it is essential to determine what you expect from an advisor. Clearly define their domain of expertise and what they will help you with. If equity is involved, decide on the percentage or other forms of compensation. It is crucial to document the agreement and seek legal advice to ensure a fair and mutually beneficial arrangement. Founders should drive the communication cadence with advisors and establish clear expectations.

Advisor Share Granting:
Based on data from 2019, advisor restricted stock agreements (RSAs) ranged from 0.2% to 1% of a company, while advisor non-qualified stock options (NSOs) ranged from 0.1% to 0.5%. Generally, the earlier an advisor joins a company, the higher their fully-diluted amount is granted. It is advisable to avoid a four-year vesting schedule since advisors usually deliver most of their value upfront. Reassess the relationship after a year or two to determine if it should continue.