Never give away equity to advisors. Free doesn’t look good to anyone, it also doesn’t work.
Let me provide some context. Entrepreneurs often believe that they can build credibility and get significant added value by bringing in more experienced partners, under the title of advisor. It is typical for such a title to be accompanied by some equity, in exchange of time that the advisor may spend with the company, or publicly using her name for various purposes. No matter what the equity range is (typically in the low single digits, or even less), I think this is wrong; here’s why.
Truly experienced and credible people –more often than not– have made some money throughout their career. This is also a testament to their track record so far, if not anything else. Now, if one can afford to pay for it, her money comes cheaper than her time. In other words, she would prefer to invest and act as an angel, rather than as an advisor per se. In this case, the interests are aligned and advice comes naturally, plus the company gets some cash.
What happens if the angel is able but not willing to invest though? Many entrepreneurs think that offering some equity for free will do the trick and keep the advisor engaged. My humble experience suggests the opposite. Along with equity also comes some hassle, from signing a few docs to receiving periodic reports, while any expected returns are much later down the road. While the incentives may be right, such issues more often than not consume the relationship, putting its very purpose at risk.
Before anything else, it is important to understand the incentives of a mentor that a founder wants to turn to an advisor. Chances are that already successful people do not expect to make a fortune out of a company they advise. If they would like to, they would invest; since they can but they don’t, their drive is different.
What they really want to, I’d argue, is to relate with people facing interesting problems. Getting exposure to a startup’s struggle is a breath of fresh air to anyone who has experienced anything similar before. The absurdly difficult problem of creating a team, a product, a business and eventually a company is intellectually stimulating in a particular way. A founder probably doesn’t need to look further; in the good cases there is a genuine willingness from the interested party to help and this is the actual driver of such a relationship.
The above suggests that anything that gets in the way of this interaction should be eliminated; money, documents, making it public or other commitments do not contribute to it. All these may well occur a little later down the road. Still, it is much better to let a growing engagement come up organically, rather than push for any of the above from early on.
After all, if someone is willing to help, she will. No mention in the company website is required for someone to make an intro. No number of shares will make an advisor interested in a company she is not. And no “board of advisors” has ever convened to save a startup from extinction; coaching sessions better work on an one-on-one basis after all.
What’s more, experienced observers well understand that the badge of advisor is a celebrated way to communicate the failure of broader engagement, for example as an angel or a part time partner. Even when the latter is the case, i.e. the startup cannot afford or convince a valuable person to join its team, I believe there are more straightforward ways to compensate her (e.g. commission) and communicate her actual engagement (e.g. external partner) that lack any negative effects and connotation.
All in all, equity is a special, almost sacred asset that founders may put in good use for a dual purpose: To either motivate employees who are fully committed to the company and who they can hire and fire at will, or give to investors who enable the founders to do just that. Everything else more often than not falls short of expectations, and I hope this post makes the case clear.