Early stage business consultant, husband, entrepreneur, comic book geek, former Army officer and helicopter pilot. Founded Guardian Networks (Acquired 2008) and been in leadership roles in multiple other startups.
Great question and I will try not to use the dreaded “it depends” answer to many times. I’ve been in several small companies and have advised several others that have dealt with this exact question. The specific answer is always different, but they have always involved the same basic levers: Pay, equity, and a bonus.
In terms of pay, hopefully you have a sense of their expectations or normal rate. That would be helpful to know before you put together your offer. I would encourage you to keep this piece to a minimum. You really want them to be incentivized on the back end of their efforts, not working for a fee. In fact, unless there is an expectation here I would recommend you not include it in your initial offer.
For equity, an advisor is typically in the .5% to 1% of the company range. I have used that range in a couple of small companies I have been involved with. Here again I don’t know if there is an expectation on their side or if they are even already on board with equity. I am assuming from the context of your question that your company is a start up? If not, you might have some constraints or tax issues that would make equity complex. If so, options may be a good route to go.
Finally, a bonus on the success of the transaction or any sales they bring is probably your simplest and potentially most motivating lever. Here also you have to calibrate to your business (for example I don’t know what your margins will bear) but I have structured a lot of “rainmaker” or senior sales types of agreements in the 10% to 15% of sales range. For the success fee on a successful sale of the business it’s tough to say without knowing the potential magnitude of your deal, but 2.5% to 5% is a good range to start with depending on all the specifics. Remember, f they have equity in the company they will get a pop there as well.
Hope that helps. Bottom line is there are a lot of things at play and you have several things you can use to get to a satisfactory deal. Just try to put most of the reward on the outcome you value the most. The most important factor (as in most things) is communication. Hopefully your advisor candidates are folks with whom you can have a transparent conversation about expectations and goals.
Good luck with it and don’t hesitate to reach out if you have more specific questions.
Ted
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