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Advisory Position – How much Equity for how much Time?

By Alok Rodinhood Kejriwal on 19 Comments / 4341 views

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!


 

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19 Comments

  1. Alok…You made it look very simple, but it’s very very thoughtful…

    Thank you and Thank you again, Alok.

  2. 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.

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

  4. 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..

  5. 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.

  6. thank babaji and thank babaji and thank babaji 🙂

    I am his typist.

    https://rodinhoodmonastery.com/forum/topics/the-voice-of-babaji-a-trilogy-on-kriya-yoga

     

  7. 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.

  8. 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..

  9. 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…

  10. Only wish things were so simply grey and white ….

  11. 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 

  12. 🙂

    1.5% for life with 3 hours contribution each month.

    Numbers can get reset when more time is demanded 

  13. Hi 

    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 ?

    Regards 

    Bhavesh Shah 

  14. Alok,

    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.

    Regards,

  15. simple….n straight…

  16. 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.

  17. Rochit,

    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

  18. 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.” 

    cheers.

  19. 🙂

    yeah. I wish I could have written that myself 🙂

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