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Reprinted from www.quicksprout.com. See the original post here.
By Neil Patel
To this date I have been an advisor to 17 companies. 16 of these advisory positions were obtained 3 to 5 years ago and I joined 1 more in the last year. Over time I dropped a decent amount of these advisory positions, but before I get into that, let me first explain what being an “advisor” is.
Companies can grant stock options to individuals who aren’t employees. The stock options usually vest over a period of 3 or 4 years and in exchange for the stock you have to help the company out with whatever they need.
If the company does well, the stock options will be worth a lot and you will have made more money in the long run than if you just asked for cash up front for your advice. On the flip side if the company fails, your stock is worth 0 dollars and you don’t get anything for your time.
In my case companies would ask me for marketing help and instead of paying me in cash for my advice they would offer me stock options. By doing this 17 times, here is what I learned:
Cash is king
Out of all of the companies I agreed to be an advisor for, 3 or 4 are failing, 8 to 10 are doing alright, and a few are doing extremely well. But even then, the money that I will earn from all of my stock grants will probably only make me somewhere in the 7 figures, but if I had charged my normal consulting fee, I would have made a lot more money.
Now granted, each company wouldn’t be able to afford my consulting rates and as a consultant I would have to put in much more time compared to being an advisor, but none-the-less I would have came ahead if I just charged a consulting fee.
Sign your advisor paperwork on time
Having stock in a startup is kind of like having stock in a public company. If each share of the company is currently worth $5, you don’t get the first $5 when you start. You only get to keep the amount above $5.
So when someone wants you to be an advisor make sure you sign your paperwork on time. Because if you don’t and the stock goes up, you’ll miss out on a lot of the gains.
This is the biggest mistake I made as an advisor as I didn’t sign a lot of my paperwork on time. If you add up all of the gains I missed out on because of this, it would exceed $1,000,000.
The best stock is restricted stock
Just for a moment, imagine that a company offers you to be their advisor. Lets say that they are currently worth 10 million dollars and they are offering you stock options for 1% of the company. And four years from now they end up selling for 20 million dollars.
How much do you make as a 1% owner?
If you said $200,000, you’re wrong. You actually only get $100,000 because the company was already worth 10 million dollars when you started. You technically only get the difference (assuming the company has no other financial obligations).
On the other hand if you owned restricted stock, you would make $200,000 because restricted stock starts at the value of $0 even though the company is worth more than $0.
If you get restricted stock, get compensated for the taxes you incur
When someone gives you restricted stock, you’re going to get taxed by the government. If you are in a 30% tax bracket and someone issues you 1% in restricted stock when the company is already worth $10,000,000 the government will tax you on the $100,000 in restricted stock you are given from the company. This means you owe the government $30,000.
In this scenario I would ask that the company cover the taxes I incur on the $100,000 plus the taxes I also incur on the cash that they are giving me to pay for the taxes.
Also, if you get restricted stock you want to file an 83(b) election so that if the stock increases in value each year, you won’t have to pay taxes on the gains until you sell your shares.
Don’t go for shares, go for value
If someone offers you an advisor position in their company, don’t just accept the offer right away. Even if you are 100% confident the company is going to be a billion dollar company, it doesn’t mean you’ll make money from it.
You have to ask the right questions to make sure it’s worth it for you. Some of the questions I ask are:
How much money did your company raise?
If you did raise any capital are there any liquidation preferences?
How much revenue and profit is your company currently generating?
How many shares are you issuing to me as an advisor?
What is the current value of each share?
How many shares are outstanding?
What percentage of the company will I own?
How much money do you think your company will be worth in the next 3 to 5 years?
Those are just some of the questions you should be asking before you accept any advisor roles. It will give you a decent understanding of how much money you can potentially make if the company does well.
Because if it isn’t worth it, you can either ask for more shares or you can just deny the offer.
Being an advisor isn’t sexy
Not only is being an advisor time consuming, but also it involves a lot of hard work. From unproductive meetings, to countless hours of your time, to even spending your own money on travel expenses, being an advisor isn’t sexy.
And if you don’t a good enough job, and the company doesn’t succeed, you walk away with zip. It’s an all or nothing game, so make sure you are doing everything in your power to help the company succeed. If you aren’t willing to do this, don’t waste your time being an advisor to a company.
Plus if you don’t put in enough time and effort, the company can technically cut you off. And not only will you lose any of the shares that didn’t vest, but this will also tarnish your name.
Before you start any advisory engagement, you should sit down with the company and both of you should outline what’s expected of each other. From who is going to be responsible for what and how much time you are going to be giving the company, everything should be hashed out before you start.
Learn from my mistakes, if you are going to be an advisor to a company, make sure it is worth your while. And if you do accept, sign your paperwork on time and do whatever’s in your power to help the company succeed.
After holding 17 advisory positions I’ve learned that I just don’t have the time to help too many companies out these days as I need to focus on my own startup. For this reason I dropped most of my advisory positions, except for the handful that I think will pay off.
Every once in a while I do take on advisor positions, but it’s usually with a company that is owned by a friend. And when doing so I don’t care what they are offering me or if it is worth my while because I don’t mind helping out friends for free.
When outside companies hit me up, I have a rule of thumb in which if I can’t get restricted stock and the company isn’t doing at least 7 figures in revenue, I don’t waste my time being an advisor. In addition to that, I only work with serial entrepreneurs who have had some success under their belt.
Now that you know the ins and outs of being an advisor, do you want to be one for other companies? Or better yet, do you want people to be an advisor to your company?
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