Early Stage Startups- Stop Granting Advisor Shares
Consider this another one of my unpopular beliefs regarding early-stage capital structures. For reference, I also don't like equity or debt crowdfunding or angel investor participation sub $50k beyond concept stage. It's worth noting I have personally made the mistake of granting advisor shares so I have some of my own scar tissue.
Early money is usually the most "expensive" money for startups that continue to grow, raise additional capital and scale. Simply put, that $1m you raised on a $5m valuation cap during your pre-seed round will dilute you more than the $5m you raise on a valuation of $40m at seed (or later). Yet, I see early stage founders routinely granting whole percentage point(s) of equity to advisors that haven't provided any investment capital. That 2%-3% of equity may have seemed small at the time, but given the pre-seed example above, you just granted that advisor the equivalent of $100k - $150k in equity for... free...
We've seen founders do this repeatedly with the best of intentions but, inevitably, there comes a time when an asymmetry of motivation or more importantly, conviction, shows itself. This can happen in several ways.
In most cases, advisors simply don't provide enough value to justify these grants and you may spend more time trying to get them to meaningfully engage than receiving anything truly worthwhile. In many cases, they become the first shareholders to want to liquidate their positions (reference asymmetry of conviction above), even if that's inconvenient or burdensome to the company. At a minimum, you'll provide basic reporting and tax info and when that K1 becomes your only interaction with an equity-holding advisor in a calendar year, you'll experience the figurative kick-in-the-teeth that mistake of granting equity continues to deliver.
Founders are going to get diluted by investors and that's an expected function of the multiple rounds of fundraising required to support a fast-growing startup. Dilution is a fact of startup life but founders should avoid any of it that is self-inflicted and unnecessary.
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I recently took a board seat with a local company I have long admired. Over several years, I've come to know the founder and his team very well and their products are amazing. I was flattered to be asked to join the board even though I am not an investor. The founder asked me if I was seeking equity or payment for my services as a board member. I remember saying no and rather expressively, saying they shouldn't grant a single share to anyone that was not an investor or option-pool-participating employee.
It's hard to say no to "free" shares as I'd love to be a fractional owner of that company and I do put in more than what's required of an average board member. Given the company's current size and capital requirements in the future, any grant to me would be an outsized burden given the value I can reasonably provide as a board member. As they say, ideas are cheap and opinions ubiquitous- which are all a board member really provides anyway. Board members and advisors are never around for the hard and messy execution part.
While drafting this, I couldn't recount a single founder ever telling me they did not get access to an amazing or trajectory-improving advisor because equity grants weren't offered. As a matter of fact, I don't think I've ever heard of a long-term, truly valuable advisor who was also a grant recipient. I'm certain there are examples of great granted advisors and I'm sure I'll see it in the comments- likely from those who received a grant and are absolutely certain the startup got a "deal" bringing them on as an advisor.
In summary, I have seen several early-stage cap tables littered with names of people that stopped contributing shortly after receiving equity grants. Founders should guard their equity closely and find advisors that believe in them, their vision and whose engagement is fueled by conviction in that team, not equity grants.
Founder and Artist for Planetary Health ? Futurist ? Speaker ? CXC Changemakers for the Planet and 4.0 Tiny Fellow 2025
1 年Really insightful, thank you!
Business Technologist | Entrepreneur | Mentor | Advisor
1 年Great advice. I have done the same and regretted it every time. It says a lot for advisors like you to put it out there to young entrepreneurs, so they do not to make the same mistake. This is why I respect Red Hawk so much.
Dept. of Ophthalmology, University of Alabama at Birmingham; Neurological Research on Glaucoma
1 年All true.
Founder & Venture Attorney at Junto Law
1 年This is a great take. Sadly, I tend to see founders treat "advisors" like trophies to collect. A huge red flag is when you see more advisors on the cap table than employees or investors. Also, the market data is pretty clear on where these advisors should land from an equity perspective--0.225-0.25%, but you will often see predatory "advisors" asking for 1-2%–insane! I wrote about some predatory uses of advisors as "gateways to financings" a few weeks back https://blog.juntolaw.com/solo-founders/. Like you said, most good advisors that offer value--do it because they believe in you and not for compensation.
Scientist, Inventor, Entrepreneur, Author, F.R.S.M.
1 年Yes, sir. I've granted small "incentives" to many advisors over decades. If they were already in your contact list and you needed advice, they would likely grant it to you as their friend or colleague without any stock options. Some advisers have never contributed anything after the fact. On occasion one might get uppity after $ arrived and assert that he/she was especially important in the company's progress, even though his/her perception was not true. Finally, it is a bit of a hassle to issue annual K1s, especially if all they ever contributed was the use of their name on a slide deck or website. Ideas are a dime a dozen, even great ideas. It all comes down to execution and hard work.