When, how, why, and who to issue advisory equity to

When I first started out as an angel investor, I was hustling my ass off…

(Still do btw :)

I was working a day job in real estate while investing small amounts of my own money into companies I thought were truly special.

I would write these small, $10K checks (a huge amount of money for most individuals) and then do whatever I could to help the founders and their companies succeed. That included introducing them to other strategic investors, early customers, and even sourcing the very first few hires.

To be honest, because I didn’t have that much cash at my disposal, my goal was to put in as much “sweat equity” as possible.

The idea was to write a check to get my foot in the door, put real skin in the game, then prove my worth to the founder as someone who could make things happen. And, in certain cases, if and when I delivered outsized and impactful results, I would occasionally be awarded a few extra Advisory Shares.

The weird thing about Advisory Shares is that there are very few “standards” or benchmarks that help determine how many shares a founder should issue and when.

And, since I went through this process with about a dozen companies over the past 10 years, I wanted to share some advice with founders regarding when, how, why, and who to issue advisory equity to:

- Cash Is King — If the investor is an institutional VC, they should be purchasing your equity with their capital, not their time.

- Advisory shares should either come in the form of Stock Options or, even better, through a Restricted Stock grant. This allows the early stakeholders to benefit from the holy grail of startup tax benefits: “Qualified Small Business Stock” (QSBS). More on that in another post.

- In the early days, it’s reasonable to reserve 2-3% of your company’s equity for advisors.

- Each advisor you select should have a different skill set — Each advisor should perform a crucial, high-leverage function or be able to support with top .01% know-how (e.g. Fundraising, product, sales, GTM, technical, mentorship, industry expertise, etc.) that cannot be done by any other member of the founding team.

- I find the FAST Agreement to be a fair template for determining how much advisor equity to issue to whom based on the advisor's performance level and stage of the company.

To read up on FAST agreements, I’ll link it in the comments below 👇👇

https://fi.co/fast