Determining a fair share of equity to offer mentors and board members can be a challenging task for startups. Generally, compensation is offered through equity instead of cash due to limited financial resources. The amount of equity to offer will depend on the type of business being operated. For small businesses, more equity may need to be given compared to businesses with higher profit potential. For instance, if you are seeking advice from a restaurant owner with 50 establishments on how to open one restaurant, you may need to give away a significant portion of equity, such as 5% to 10%. Conversely, if you plan to establish a chain of restaurants, you may offer less equity.
Although there is no set rule of thumb for how much equity to offer, board members in startup companies typically receive 1% to 3%, depending on their experience and expected involvement in the company. However, it ultimately depends on what the mentor or board member believes the equity will be worth. If they anticipate that the company will be highly successful, they may accept less than 1%. Conversely, if they anticipate that the equity will be worth little, they may require more equity to be worth their time.
When offering equity, it is recommended to have the shares vest over a period of time, typically between three and five years. This ensures that the mentor or board member fulfills their commitment to assist the company in achieving its goals.
While some mentors may offer advice for free, it is unrealistic to solely rely on volunteer mentors to create an effective advisory team. To attract top-tier advisors, it is necessary to offer equity, which provides a vested interest in the success of the company.
