Table of contents
- The Importance of Advisor Compensation
- Tips and Strategies for Negotiating Advisor Compensation
- 1. Understand your value proposition
- 2. Do your research
- 3. Understand the company's financials
- 4. Add Value Before Formalizing the Relationship
- Compensation for Advisors
- Image: excerpt from FAST agreement - equity compensation options
- Negotiation Tips for Founders
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As a startup advisor, you play a critical role in the success of a new business. You bring valuable expertise and guidance to the table, and as such, you deserve to be compensated fairly for your contributions. However, negotiating advisor compensation can be a tricky process, both for advisors and for founders. In this post, we'll discuss some tips and strategies for negotiating advisor compensation that benefits both parties, and we'll introduce the Founder / Advisor Standard Template (FAST) as a tool for simplifying the process.
The Importance of Advisor Compensation
Before we dive into negotiation strategies, let's discuss why advisor compensation is important in the first place. As an advisor, you're taking time out of your busy schedule to offer your expertise to a startup. You may be foregoing other advising or project opportunities to work with this particular company, and you're investing time and energy into helping them succeed. As such, you deserve to be compensated for your efforts.
On the other side of the equation, founders understand the value of having a knowledgeable advisor on their team. They recognize that you bring unique insights and experience that can help them avoid common pitfalls and accelerate their growth. By compensating you fairly, they can ensure that you're motivated to continue working with them and helping them achieve their goals.
Tips and Strategies for Negotiating Advisor Compensation
Negotiating advisor compensation might appear tricky for both founders and advisors. Here are a few strategies which can help advisors to properly evaluate their contribution and benefit both sides:
1. Understand your value proposition
As an advisor, it's important to understand what you bring to the table. What specific expertise or experience do you have that can help this startup grow and become successful? By expressing your value proposition clearly, you can help founders understand why they should compensate you fairly for your time and energy.
2. Do your research
Before entering the negotiations, make sure you understand their goals, pain points and target market. That way you can tailor your advice and make yourself more valuable to them in particular.
3. Understand the company's financials
It is very important to understand the financial health of the startup you'll be working with. How much funding have they raised? What is their burn rate? By understanding these financials, you can understand what advice would be suitable and what - irrelevant. Moreover, it will give you a realistic picture of their needs and abilities in terms of compensation.
4. Add Value Before Formalizing the Relationship
Your advice can be perceived as a small investment for startup founders. They need to have a clear vision, so it’s important to demonstrate your value before negotiating a compensation. This can be done by offering free advice and feedback, making introductions or volunteering to help with a project.
By adding value in this way, you'll establish trust and credibility with the founder. It also shows that you're invested in their success and are willing to go above and beyond to help.
Remember, the best advisor relationships are built on mutual respect and trust. By taking the time to build a relationship and add value, you'll be in a better position to negotiate fair and equitable compensation that reflects your contribution to the company's success.
Compensation for Advisors
The compensation level for advisors is a critical aspect of the agreement. It is important to strike the right balance between incentivizing the advisor and preserving equity for the founding team.
To help both advisors and founders set fair compensation levels, the Founder Institute has developed a standard equity compensation framework for advisors called the Founder / Advisor Standard Template (FAST). The framework is designed to be simple, transparent and flexible enough to fit a wide range of startup scenarios.
The FAST Agreement is used by tens of thousands of entrepreneurs and advisors per year to establish productive working relationships, trading advice and support for a standardized amount of equity. It simplifies the process of establishing an advisory relationship by removing the need for cumbersome negotiation, legal drafting and review.
The FAST Agreement includes three levels of engagement for advisors: Standard, Strategic, and Expert. The compensation levels vary based on the company stage and the level of engagement.
Level of Engagement
The levels of engagement reflect the amount of time and effort an advisor commits to the company. For example, an expert advisor for an early-stage startup who meets with the team monthly, recruits some talent, and takes a customer call will earn 1% of the company in the form of restricted stock or options vesting over a two-year time period.
It is important to note that the FAST Agreement is only a guide, founders and advisors should negotiate the compensation levels based on their specific circumstances.
Image: excerpt from FAST agreement - equity compensation options
Negotiation Tips for Founders
If you are a founder, negotiating with advisors can be challenging, but it is essential to ensure that you are not giving away too much equity. Here are a few tips to deliver your needs and expectations:
- Be clear on the advisor's role: Define the advisor's role and responsibilities upfront to avoid any misunderstandings later.
- Establish a vesting schedule: The vesting schedule should be used to incentivize the advisor to stay engaged with the company over the long term.
- Define what your needs are: with so much going on as a founder it’s a challenge to articulate the needs clearly. Speak to other founders who are at a later stage.
- Manage your expectations: any single advisor will be great for a specific task and stage, but is likely not the solution to all the challenges you face and need advice on.
- You’ll need the cooperation capacity: ensure you or your team have time available to extract value from the advisor. Don't try to maximize value, as it will require more time with the advisor. Typically, 2-4 hours/month with an advisor is enough for a valuable relationship.
- Think about your leadership team: it’s not just you who needs an advisor. The company will benefit if you help your co-founders and management grow through the help of advisors.
Negotiating advisor compensation can be a challenging task for both advisors and founders. By utilizing a standardized agreement like the Founder/Advisor Standard Template (FAST), both parties can save time and money and focus on building a productive and successful relationship. Advisors and founders should approach the relationship carefully and take the time to build chemistry and assess the fit before committing to a formal agreement.
By following the tips and strategies outlined in this post, both advisors and founders can skip the lengthy dance of negotiating advisor compensation or avoid the energy that the advisor brings to the startup evaporating over time, because parties did not agree on a sustainable and fair compensation in time.
Here is the FAST agreement template:
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