Allocating equity in a startup – even to mentors!

davd parker

One of the most difficult and challenging issues facing any founding team is how to allocate equity and who to allocate it to. It’s a zero sum game – you only have 100% of equity to divide up, you can’t generate any more. Issuing more shares just dilutes the ownership of existing shareholders. I’ve written about this issue previously: Founder equity for academic teams turning into companies. And obviously, hot topic that it is, there’s a lot on the Web about it.

However Dave Parker’s article on Tech.co How Much Equity Do You Give Early Team Members? was the first article I’ve come across that not only addresses allocating equity to advisors and board members, but mentors as well. Not only that, mentors come first! It’s worth quoting Dave Parker in full about what he has to say about mentors, with my comments interpolated.

Mentorship is free – or at least should be. Mentorship is something you do to give back to your community. Yes, there are people that use it to sell their services – but you’ll discover them soon enough. You should plan on buying the lunch/coffee/beverage.

Yes, mentorship is a purely voluntary activity. But Dave Parker’s warning about professional service providers, be they lawyers, accountants, financial advisors, or insurance agents, is advice mentors need to heed. One of the founding principles of the MIT Venture Mentoring Service is that all mentors agree to come to the organization with no agenda of their own. So you don’t have to worry about this issue if you are lucky enough to be mentored by VMS. But accelerators, incubators and other entrepreneurial organizations tend to attract professional service providers like flies to honey.  Their thinking is straight forward: get to a hot startup before it’s hot and have their fees grow with it. Maybe even take equity in for all or part of their fees and really make money if the company strikes it big. You will need all these professional service providers and perhaps others. But the best way to find them is through personal referrals from other entrepreneurs, not by who happens to introduce themselves to you at a networking event or who volunteers to mentor founders.

One way to pay for mentorship is simple: pay it forward. Are you currently mentoring someone coming up behind you? Do they look different than you? The answer to both questions should be yes. You can always find someone that needs help who is a “couple of chapters behind you in the book.” What skill set do you have that you could mentor?

The point about not looking like you may seem simple – but the comment is about being intentional. Selection bias and our own networks tend to keep us insular. Branch out. Here’s a great article on Men who Mentor Women at HBR.

Again, Dave Parker has something new and important to add to the subject of mentoring: diversity. Frankly I’ve been only concerned about diversity amongst the mentor groups I belong to, as they are dominated by white senior citizens like myself. VMS and other mentoring organizations have made concerted efforts to add women and minorities to but in general we’ve let the founders self-select. So if you have are choice in choosing who you mentor, keep diversity in mind and help give women and minorities a leg up the startup ladder.

If you find that you’ve met with a specific mentor on a recurring basis – don’t take the relationship for granted, make it more formal. Especially if mentors continue to show an interest and add value, consider moving them up the ladder to advisors. You want your company to survive and grow – it’s good to have aligned incentives. They may say no, and that’s okay, but the offer shows that you respect and value their time.

I’ve written elsewhere about the value of advisory boards and how to start and manage them (just search “advisory boards” on the blog). And Steve Blank, an entrepreneurial authority, recommends founders put together an advisory board “as early as possible.” So do consider adding your mentor or mentors to your advisory board. But keep mind that while gaining an advisor you are losing a mentor. The roles and responsibilities are far more formal for an advisor than a mentor. And an advisory board advises the venture; mentors guide and advise the entrepreneur.

Read Dave’s article in full for help how to allot equity to board members and founders, and additional valuable advice on the subject.

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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