Equity for startup advisors-

What to keep in mind when deciding on sharing equity

At some point, a founder gets an offer from an angel investor or advisor to compensate them for their work or support via equity, and founders need to think carefully about "how to deal with it."

Even though qualified support can be a great advantage for a startup. You should keep in mind that partnerships don't always work out as promised, and equity is the highest asset at this stage.

Before making this business-changing decision, it's essential to think about what kind of support is necessary or beneficial to your company's needs. How high is your company valued right now? What services and network, and how much sweat does the new partner bring to the table? What amount is appropriate for this expertise? Are they good networkers and door openers in your sector or an influencer in your industry or target market? Is the offer only sweat for equity, or will the angel investor or adviser also put money into the company?

For example: If your company is worth EUR 500.000 right now and you value the advisor's services with EUR 50.000 EUR, the question is: Is this support worth 10% of the company … even if the company is worth EUR 5.000.000 later?

Fortunately, we have compiled some guidelines and benchmarks to help guide you.

Sweat for Equity

Any corporate finance professional will tell you that issuing equity is the most expensive form of funding. The business is literally "selling off" the benefit of its future profits to save some cash now.

A startup should only issue equity if it truly believes the consultant's services are worth the very high price. This is usually only justified for founders and key people who bring rare talents to the startup.

In all other cases, it is likely to make more sense to raise cash from investors and then pay your consultants with that cash. A professional investor is more likely to be able to properly assess (and therefore truly value) the opportunity presented by the startup.

We saw a lot of startups that have issued equity to consultants and very much regret it. Think about terms like 'anti-dilution' rights.

If you are not sure if sweat for equity is a good idea, reach out to ? HTSB HighTech Startbahn and feel free to discuss this with our experienced colleagues.

The "classical Advisor" like a professor or mentor.

Determining the appropriate amount for advisors can be overwhelming. Typically, equity of 1% is being paid for long-term advisors with a two-day work commitment- which is a solid start, but when deciding on these factors, startups first need to distinguish between three frequent types of advisors who each serve a different purpose in their company:

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I Board Advisors- usually industry experts and/or ex-founders themselves who provide mainly strategic expertise and often take a seat at the board. Due to their level of influence are given an average of 1-2% more than other types of advisors.

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II General Advisors- This type of advisor is quite similar to the Board Advisors -they're guiding the startup alongside their broad spectrum of knowledge within subjects such as industry Insights. Often, they can even be viewed as mentors, which does and should differ from a task-specific hired consultant. They typically take a small percentage of 0.5-1% equity, and other than the previously mentioned kind, take no seat on the board.

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III The third type of advisor is quite specific, as their broad knowledge of the tech sectors make them a highly valued asset to the company. Tech Advisors may support with best practices, system architectures, or even in some cases biz dev. Due to their importance to the company, they are commonly given between 1-2% equity or a mix compensation of cash and equity.

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The shares these types of advisors can receive are customarily shares assigned as compensation, meaning that they do not have options on these shares which would give them rights to purchase more shares in the future at any given date and set price. There are a few aspects one needs to consider before deciding on what type is appropriate or even handy for advisors. For example, taxes, shareholder approval, or voting rights must be considered. It is crucial for the future of a startup that these kinds of decisions are made with both legal and financial experts to determine which option suits both the advisor’s and the company's interests.

To protect the company's equity, it is additionally important to include a vesting schedule for advisors shares and share options. It ensures that in case the advisor will have to take a permanent or temporary early leave he /she/they will not receive all their shares or options. The duration of such vesting schedule can often vary but is commonly set to have a four-year vesting period with a one-year cliff.

Deciding on what amount of equity one should grant advisors is ultimately based on the advisor's role and the very unique and varying circumstances of the company. The Importance of negotiating, reflecting, and crunching these numbers while keeping the market in mind. Are central for both parties to come to a fair agreement. Weighting pros and cons on the matter can help make this decision:

Pros:

• Advisors' Expertise & Experience, especially within the pre-seed to growth phase
• Opportunities to enter target markets based on their vast network.
• Advisors offer negotiating skills during challenging times.
• They're also validating and resume value.
• Given time, they might invest.

Cons:

• They might not be fully committed to the company's success and are only temporarily submitting themselves.
• Granting equity can alter the founder's ownership of the company.
• Some might not apprehend or fully commit to the company's vision.

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Keeping these aspects in mind and choosing the right person(s) wisely (since you're hopefully bound to work with them for several years), in conclusion, will have a direct impact on your startup's future and its odds of success. Take your time, weigh the pros and cons, get to know matching candidates, and decide for your companies' best interests.