Analysis

The Advisor Compensation Gap

I’m getting the feeling that there is a significant gap between what a good Advisor is worth to your start up, and what the going compensation rate for them is in Silicon Valley.  An Advisor typically gets .1% – .4% of a start up, vesting over 2-3 years, with 100% acceleration on change of control.  But they can add more than 10X that value to your company by doing just one of many things including: introducing you to a key teammate like a VP Engineering, giving you credibility where you had none, keeping you from wasting 6 months pursuing a wrong strategy, improving your pitch to investors by 10%, telling you business metrics that would’ve taken a year to discover on your own, or keeping you from signing a contract giving someone a “first right of refusal.”  Good Advisors often do several of these things, adding huge value, but not getting compensated for it.   

Off the top of my head, I can think of five possible reasons this gap persists. 

1) Advisors tolerate the gap because they have fun

2) Advisors tolerate the gap because they believe they will learning something valuable 

3) Entrepreneurs won’t pay more because Advisor performance is too variable.  Maybe the entrepreneur actually IS paying for the value overall because they give .1% – 4% to many Advisors, and only one Advisor makes the difference. 

4)  Perhaps there is no perceived cost to the Advisor for giving a few hours per month.  There really is both a cost and an opportunity cost, but the point is the perception of that cost may be too low due to underlying math, which says “What’s two hours out of 720 hours per month? Nothing, really.”

5) Perhaps Advisors tolerate it because it’s the going rate, and everyone has gotten used to it.  Kind of like how everyone has become used to 2.5% management fees for hedge funds. 

The other way to look at it might be to conclude there is no real gap.  Maybe I’m imagining it.  Perhaps we would feel this same gap for anyone in a startup if we looked closely at their situation… like the Office Manager, or the Director of Sales, or the interface designer. 

So I wonder what would happen if we created a website that auctioned off Advisor time?  Would the average compensation go up or down?  What should a rational Board of Directors be willing to pay for their CEO to get advice from a guy like Philip Rosedale about their startup?  Or from Caterina Fake about their Website design?

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