Advisory Position - How much Equity for how much Time?

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:

  • Rosh An what if there are multiple founders and also the founders have invested in the startup initially say 10000 $ or whatever amount.

  • Alok Rodinhood Kejriwal so adjust! if there are 10 promoters, then the company must be something! then 10*200 = 2000 hours = 100%, so 1 hour = 0.05%. So 3 hours = 0.15%

    but i assume that 10 promoters + money would build at least the TAJ MAHAL or something!

 

Tags: Advisory equity, Advisory role, How much equity for advise

Views: 1164

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Replies to This Discussion

Permalink Reply by Aravind Gogineni on July 2, 2012 at 4:48pm

Alok...You made it look very simple, but it's very very thoughtful...

Thank you and Thank you again, Alok.

Permalink Reply by Alok 'Rodinhood' Kejriwal on July 2, 2012 at 5:18pm

thank babaji and thank babaji and thank babaji :-)

I am his typist.

http://rodinhoodmonastery.com/forum/topics/the-voice-of-babaji-a-tr...

 

Permalink Reply by Aashish Gupta on July 2, 2012 at 4:58pm

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.

Permalink Reply by Alok 'Rodinhood' Kejriwal on July 2, 2012 at 5:06pm

then don't invite advisors. become hanuman, ram, krishna and allah yourself

Permalink Reply by Aashish Gupta on July 2, 2012 at 5:18pm

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.

Permalink Reply by Vijay Khubchandani on July 2, 2012 at 5:20pm

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..

Permalink Reply by Aravind Gogineni on July 2, 2012 at 5:11pm

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..

Permalink Reply by Anshoo Grover on July 2, 2012 at 5:12pm

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.

Permalink Reply by himanshu chanda on July 2, 2012 at 6:23pm

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...

Permalink Reply by Sajal Gupta on July 3, 2012 at 7:01am
Only wish things were so simply grey and white ....
Permalink Reply by bhavesh shah on July 3, 2012 at 11:45am

Hi

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 :) ) 

Regards 

Bhavesh Shah 

Permalink Reply by Alok 'Rodinhood' Kejriwal on July 3, 2012 at 11:58am

:-)

1.5% for life with 3 hours contribution each month.

Numbers can get reset when more time is demanded 

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