A Thought Leader Guest Post from Dr. Fred Haney, Author of The Fundable Startup:
How should a startup company compensate its advisors?
This is a tricky question because there are no guidelines and most founders do not have experience in this area. But there are some general principles that can help you arrive at compensation that should be fair to the company and attractive to your advisors.
One obvious approach is to try to give your advisors an interest in your start up that is comparable to the dollar value of the time you expect them to contribute. This assumes of course that you can anticipate how much of their time you will need and how to value that time. For example, if you want to buy $25,000 worth of an advisor’s time and your company is worth $2 million, then you could give that advisor an option to purchase 1.25% of the company. Some advisors might reasonably want a premium in exchange for the risk and delay in payment they are taking, so you might settle on something like 2.5%, for example.
Another important principle, I believe, is that an advisor’s compensation should be comparable to the value he or she is likely to add to the company. The concept of “value-added” is subjective, but it is possible to make reasonable estimates as to the value of some contributions.
“How much we owe to good teachers, good education, and good advice!”— Robert Mundell
Valuing Early Contributions
In the very early stages of a startup—before any capital has been raised—the value of the company might be something like $1-2 Million. At this stage, it may be possible for an experienced advisor to add a few percentage points in value or possibly as much as ...
About the Author
Thanks for this Guest Post to Dr. Fred Haney, the Founder and President of the Venture Management Company, a firm that provides assistance to high tech companies. He is the author of The Fundable Startup: How Disruptive Companies Attract Capital, published by Select Books of New York.
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