Are Advisors Worth the Dilution?

Did a Figma advisor make $65M in the IPO?

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90%+ of advisors are NOT worth the dilution. They take too much equity and provide too little value.

I have joined a couple of companies where the cap table showed several advisors that were still vesting. When I asked the CEO what those advisors were doing, the response was something like, “I occasionally get on a call with him/her or we go out to lunch”.

So….you gave a bunch of equity to someone you occasionally have lunch with?

I am not saying that hiring an advisor is always a net negative. They can be super beneficial when you hire the right person, for the right reasons, with the proper scoping. But companies usually don’t get this right.

Here is what I will cover:

1. Advisor compensation

   1. Benchmarks (and did a Figma advisor make $65M?)

   2. Advisors’ ROI

   3. Advisor equity terms and agreement template

2. Why hire advisors?

   1. Advisor roles

   2. Advisor scoping/expectations

3. Advisor for Investing Access

Advisor Compensation

How much do advisors get paid?

The most important question first — compensation.

Advisors are almost always paid in equity (not cash). Usually if someone is asking for cash then it feels more like a consultant that just wants the sexier title of “Advisor”.

Carta has great benchmarks by fundraising stage that generally line up with my experience. But…the scoping/expectations of an advisor NEEDS to be considered when determining how much equity they get (more on that below).

Did a Figma advisor make $65M?

Figma IPO’d this past Thursday and as I write this article it has a market cap of $60B! If you were so lucky to get an advisor role with Figma after its seed round you might be taking home ~$65M for maybe a few hours of work a month….

Here is my quick math:

I have no idea if Figma actually hired advisors or at what stage, but if they did…those advisors just made A LOT of money. Even if this hypothetical payout is cut in half because the advisors were hired after the Series A or because they didn’t get 75th percentile benchmarks, those advisors still made tens of millions of dollars.

But…there are VERY few Figmas in the world. Just like angel investing, the vast majority of early stage companies fail and advisors get nothing for their time.

How I evaluate ROI on advisor dilution

Compare it to what you would have to pay a full-time hire for a similar role. While advisors don’t also get cash, the equity dilution is often pretty similar.

Median advisor grant at a seed round is 0.11% while hires 6-10 is ~0.2%. While it looks like a full-time hire is 2x the dilution, you need to remember that advisors vest typically over 24 months (or less) while employees are usually 4 years. So from a time-weighted perspective they are about the same dilution.

If you go a bit further to a Series A/B company, the 75th percentile for an advisor is 0.12% (Series A) and 0.06% (Series B). Vesting term difference adjusted, this is about what you would pay to a “Head of” or VP level role in equity.

Is the equity dilution worth the cash savings to get someone for maybe 1 hour a week instead of a full-time person?

Sometimes, yes. Maybe you can get someone REALLY great as an advisor that you wouldn’t be able to get at your company stage full-time (or you couldn’t afford them). But remember, you are hiring someone for maybe 1 hour per week. Even if they are amazing you don’t get that much from them.

If more companies made this comparison, less advisors would be hired.

Equity Compensation Terms

Equity compensation for advisors looks a bit different than employees. Advisors get much more favorable terms:

• Vesting Period: Typically vests over 2 years (or shorter). Usually advisors are most helpful until the next level of scale is reached and more full-time folks are hired to fill the gaps. I also like performance-based vesting (based on some milestone or target) which forces clear scoping and the achievement of targets.

• Vesting Cliff: Unlike employees who almost always have a 1-year cliff, advisors usually have no cliff or it’s very short (like 3 months) because equity is their only form of compensation.

• Equity Type: Typically stock options (NSOs since they aren’t employees), but RSAs are fairly common when the company is very small.

• Single Trigger Acceleration: Advisor shares are typically accelerated in a change of control event. Company execs often get double trigger acceleration clauses (change of control and fired) while regular employees almost never get either of these.

• Post-Termination Exercise Period (PTEP): Typically this is 90 days just like employees, but with one important caveat. Advisors are rarely actually terminated, even if they stop providing work so their PTEP is effectively until the grant expires (10 years)

  • CEO forgets about actually terminating them

  • Doesn’t want to create any conflict

  • A small amount (<10%) of advisor agreements contain a “inactivity clause for termination” to terminate advisors if they stop providing services, but it’s not typically exercised

»Here is a great standard advisor agreement that should work in most cases.

What do advisors do?

There are a few reasons a company may hire an advisor. Some reasons are better than others…Below are the main ones I see:

1. GTM advisors - People who have a large distribution in a company’s target audience, deep connections at important prospects, or someone who is an experienced GTM leader for your market/ICP.

2. Technical advisors: Help guide, shape, and recruit for the product. These folks often have good connections at partners or prospects.

3. Industry experts - Deep industry expertise to help guide the company

4. Network - Help recruit, intros to prospects, or intros to investors

5. Credibility boost: Looks cool to have a big, credible name as an advisor. CEOs won’t admit that they do this, but they do…

Clearly define the scope

Often the problem is that companies bring on an advisor without any real expectations or scope of what that advisor will do.

• What exactly are you hiring an advisor for?

• What are the expectations?

  • # of calls per month

  • Some kind of regular output

  • Providing regular network introductions

• What does success look like? What are the targets?

Without proper scoping, you won’t really know how much equity they should be given. Someone doing weekly calls should usually get more equity than someone doing monthly calls

Advisory for Investing Access

This started to become popular in the glory ZIRP days — give us free advisory/consulting services and we will give you the privilege of investing in our next fundraising round.

It’s not a bad trade, but just know that once the round closes many of these “advisors” disappear and magically become a lot busier than before.

Final Thoughts

Very carefully consider if an advisor is worth the dilution. It may feel like free money to throw equity at them (since there is no cash), but I rarely see advisors being worth it.

Sometimes, yes.

When a company gets a great advisor and properly scopes expectations then it can make a lot of sense.

*thanks Sandy Kory for reviewing and giving feedback!

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Footnotes:

• The Finance Org Chart (by OnlyCFO): Get my deep-dive I did with NetSuite

• Launch of OnlyLawyer Newsletter!! I have one of the best in-house tech lawyers writing everything you need to know. No fluff. Just the important info you need in regular people words. New profile pic…click it!