I am an advisor to a couple of Companies and meet the founders regularly to help them in their business.
Also, I get proposals to help start ups, etc and join their advisory boards.
So far, I could never calculate out the delicate equation between how much time to dedicate to a Company vs the equity offered to me or held by me in the Company.
All of a sudden, this struck me:
- Assume that founders work 10 hours a day, 20 days a month (officially)
= 200 hours a month.
When they start a Company, they own 100% of it.
So, 200 hours a month = 100%
- Therefore, every 1 hour spent per month = 0.5%
This is the formula!
So, if someone asks you for 3 hours a month as advisory role, ask for 1.5% equity in return!
This equation may change as the Company gets funded and has a stated valuation, etc. but then the basic equation still holds its ground, because you are still not getting paid for your time unlike the VCs who paid and bought a stake.
So, if the Company has got funded via Series A and the promoters now own say 30%, then the equation becomes:
200 hours = 70% (held by promoters)
So, advice per hour each month = 0.35% equity (post funding)!
Facebook comment (after posting) of importance:
Alok...You made it look very simple, but it's very very thoughtful...
Thank you and Thank you again, Alok.
thank babaji and thank babaji and thank babaji :-)
I am his typist.
Umm, how do you account for the fact that the founders are taking all the risk associated with the business - financial as well as how it will affect their career in the long-term - clearly they contribute more than just 200 hours of labour. An advisor may spend 3 hours, but its not his future on the line. I don't think it's a fair deal to take 1.5% for zero risk and 3 hours of advice.
then don't invite advisors. become hanuman, ram, krishna and allah yourself
Well, I'm not against having advisors or giving them a fair share of equity. Just against the logic of your formula, which doesn't take level of risk taken into account.
I feel it is rather better to offer that 1.5% to the Advisor, who can turn your 98.5% into Gold.. Than holding on to that 100% and watch it rust-out one day..
Asshish, i guess it's not that you take just 3 hours of advice...Every minute of that Advice is derived from the Hundreds of Hours of experience of the Advisor and the Risks he/she has earlier taken.This advice also help the founders in not making the same thousands of mistakes made by the Advisor himself/herself earlier...
It's worth...definitely worth..
I read about something related to this (some example from Silicon Valley, probably Ron Conway as an advisor to a Jason Freedman start-up):
The 'advisors' invest a small amount in the company, and that decides their equity return (seed or angel investment time). Ofcourse the equity given also represents the value of 'advise' they are supposed to provide.
I liked the intent of this exercise a lot, because I interpreted it as the advisor saying: Yes, I find your idea nice and exciting. I'll help you with my experience, let me join in on your growth story. I'll bet my money on you and my help.
I don't know how feasible that is in India, am not even sure how popular this is in the Valley, but just that I liked the concept a lot.
Alok, the formula seems pretty clear and right in most cases... I do agree to it but partially. Reason being the time:stake part. (I wont crib that it is high :) )
As you have already highlighted 200 hours of founders/month is the 'Official' time we are considering here. This time will keep on increasing basis need. Same should be applicable for advisors too. At times specially during the earlier phases as a guide an advisor has to put in more hours. If he/she is hardbound on the time factor it then becomes greed and not guide.
Incase if the relationship is of a real guru even doubling his stake would not matter. Else 'I will give you an hour or two a month and rest you figure out' thing will be counter productive for the startup.
I hope you agree...
1.5% every month for every 3 hours ? or is it one time 1.5% for monthly 3 hours for 12 months
Also why is the startup life for 1 month and not 1 year ( in case the 1.5% is a monthly fee :) )
1.5% for life with 3 hours contribution each month.
Numbers can get reset when more time is demanded