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:
Thanks. I think its super value for money. Dont know why some people are cringing.
Also when you pay for something you tend to value it more ..
but since most startups arent fully incorporated how will the equity get split ?
Also any draft agreement on the same ?
Would like to talk about what happens beyond this discussion. How do we ensure that advisors spend 3 hours every month ? I have seen scenarios where equity discussion is settled but after few months, advisors don't give 3 hours due to some or the other reason.
Answer to Rosh An didnt clarify one aspect
Say 5 founders invested 1 lac capital each. Contributing 200 hours each but when an advisor comes in with zero investments.. but claims for every hour he inputs like the cofounders. but isnt there any added value to their equity because of the investment the founders have made along with the time devoted.
This isn't a IIT JEE/ CAT exam. This is a concept.
Marissa Mayer the new CEO of Yahoo is going to get paid between 70-200 MILLION DOLLARS salary. Try doing maths on that
I missed reading on the earlier comment. A good concept nonetheless... just too summarise your answer "the advisor doesnt invest money but his experience is obviously much more than the money invested by the founder."
yeah. I wish I could have written that myself :-)