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What are advisory shares, and how should you evaluate them?

At times startup founders need mentoring. First time founders don’t have experience in building companies. Good mentors, although rare, can add a lot of value. They can help in engineering, sales, and more importantly fundraising.

Since early stage startups don’t have a lot of money, founders give mentors equity for their time and expertise. The reason is simple. If the startup becomes successful, this equity will be worth a mini fortune for the mentors. If not, then hard luck. Mentors, like founders, investors, and investors, also bet on startups to become big.

How much equity should you give to a mentor?

Most founders overthink about it. It’s natural for them to overvalue their equity because all founders believe they are building an unicorn. Founders are naturally optimistic people. Otherwise, they wouldn’t be betting their careers in high risk opportunities.

What founders don’t realize is this equity is worthless until they raise significant venture capital. Few investors are interested in buying secondary shares in startups under $50 M valuation. So the mentors can’t profit from this equity unless the startup reaches a certain scale. It doesn’t matter whether the mentor has 10% or 1%. He can’t sell it for a dime.

However, it’s not implied , founders should give 10% equity to mentors. They have to preserve it for future investors and employees. But 1 or 2% equity to an excellent mentor is fine.

Rather than thinking whether to give 0.5% or 0.75% to a mentor, founders should spend time and effort finding good mentors. Apparently  most people who masquerade as mentors don’t add any value and good mentors do exist. They are just as rare as unicorn startups

So finding good mentors is a challenge, especially in India where every 10th person writes mentor on his LinkedIn profile/Social Media Handles . Assuming you find someone who adds a lot of value to your startup, don’t bother too much with the vesting, ROFR, ROFO, and other complicated structures.

If you believe in a mentor, give him 1-2% depending upon the time he’ll give to your startup. If the startup becomes big, everyone including you and him will make a lot of money. If not, 0.5% will be as worthless as 10%.

 

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