Part 11 of 17 in Splitting the Pie: Navigating Founder Equity in India
Most founders treat advisors like co-founders, handing out hefty equity stakes and titles without a second thought. Here’s why that’s a mistake that could cost you dearly. In the gritty world of Indian startups, you’re better off treating advisor equity like a scalpel, not a sledgehammer. The truth is, if an advisor wants 2% equity, they should probably be joining you full-time. This isn’t Silicon Valley; your equity is precious, and you need it to attract top talent and keep control of your company.
Stop Giving Advisors Founder-Scale Equity
The Illusion of Value
Advisors can change your company’s trajectory, but more often than not, they don’t. Most advisors who ask for 2% equity and a fancy title will give you a couple of hours of their time and disappear. The market range for a working advisor in an Indian seed-stage company is typically 0.15% to 0.50%, vesting over 18 to 24 months with a six-month cliff. If they demand more and aren’t willing to put in the hours, show them the door.
Put It in Writing
Every advisor relationship should be defined clearly in writing. What’s the scope of their work? How many hours are they committing per month? Make it clear that unvested grants will lapse if they go silent. Silence is the default setting of advisory relationships.
Most advisors who ask for 2% equity will give you a couple of hours and disappear.
Early Employees Are Not Co-Founders
The Role of Early Employees
Employee number one in a five-person company might feel like a founder. That doesn’t mean they should be treated as one. They deserve a large ESOP grant, typically 0.5% to 2.0% depending on their role and the stage of your startup. Their vesting should span four years with a one-year cliff, and they should receive a salary close to market rates.
Titles vs. Equity
Titles are cheap; equity is not. Giving someone a “Co-founder” title is one thing, but once you allocate equity, it’s a claim on the story and future of the company. Be judicious with how you allocate these precious resources.
Build the Pool Before Investors Ask
Investor Expectations
Investors will expect an ESOP pool of around 10% to 15% on a fully diluted basis by seed, and potentially larger by Series A. They will want this pool established before they invest, so the dilution impacts existing holders, not them. If you scramble to create this pool when a term sheet lands, you’ll end up making it larger than necessary.
Legalities and Logistics
Setting up a company-level ESOP scheme requires a special resolution, a written plan, and at least one year of vesting before an employee can exercise their options. This statutory one-year floor is why last-minute grants to people who are about to leave don’t work as founders hope.
Investors expect an ESOP pool of 10% to 15% on a fully diluted basis by seed.
How Much Is Enough for a Key Early Hire?
The Shrinking Equity Pie
As your company grows in value, the equity you give away becomes more significant. A 1% grant at a ₹4 crore post-money valuation is vastly different from a 1% grant at ₹400 crore. Make sure your potential hires understand the rupee value of their ESOP grants, and help them do the math without promising a future listing.
Balancing Equity and Cash
Indian candidates often compare ESOPs to their CTC (Cost to Company). While you can’t compete with the cash packages of larger companies, you can offer the potential upside of equity. Be transparent and guide them in understanding its true value.
The Bottom Line
Advisors and early hires should not be viewed through the same lens as co-founders. Your equity is a tool, not a giveaway. Use it to incentivize and retain genuine contributors. Clearly define roles, expectations, and vesting terms. Prepare your ESOP pool before investors come knocking, and always remember: a title is not a ticket to your company’s future.
FAQs
How much equity should I offer an advisor?
The market range for an advisor in an Indian seed-stage company is typically 0.15% to 0.50%, vesting over 18 to 24 months with a six-month cliff. Anything more should come with a significant commitment of time and resources from the advisor.
What should I include in an advisor agreement?
Clearly outline the scope of work, time commitment, and vesting terms. Make it clear that unvested equity will be forfeited if the advisor becomes inactive.
How do I handle equity for early employees?
Offer them a large ESOP grant, usually between 0.5% to 2.0%, with four-year vesting and a one-year cliff. Ensure their salary is competitive in the market.
When should I establish an ESOP pool?
Ideally, establish your ESOP pool before seeking investment. Investors will expect a pool of 10% to 15% on a fully diluted basis by seed.
Can I offer ESOPs to founders?
Generally, promoters and >10% directors are barred from ESOPs. However, DPIIT-recognised startups can grant ESOPs to promoters. Keep founder ownership on the ordinary share register with reverse vesting.
If you’re looking for hands-on mentorship and investment, consider reaching out to Malpani Ventures for guidance tailored to Indian startups.