When approaching knowledgeable people to become advisors for a startup should you offer compensation? Do advisors expect compensation other than recognition? If so, how would you approach this? If you have more than one advisor on a board wouldn't it be wrong for one advisor to be receiving more compensation than another?
The typical advisory board (or Technical Advisory Board, TAB) member does not get monetarily compensated but does get stock options in the company and a per diem for expenses. The board appointment is usually 2 years and the stocks vests over that time. This compensation is approved by the board of directors and there is usually a boiler plate letter that sets out the criteria, which does not change from advisor to advisor.
You want advisory board members that are both knowledgeable and that believe enough in your business to take the deal above. Any other kind are just paid consultants, which don't give you their true opinion or could have a conflict of interest.
Assuming that you are looking for advice from your advisory board (that's not always the case - see below), I don't think you have to offer options to your advisors, but it does help.
I sit on the advisory board of three startup companies. One of them has granted me options - the other two have not offered any compensation. I help these companies for the same reason that I contribute to this site - because I like to see other entrepreneurs succeed and because it helps me clarify what is working and not working in my own business.
I also participate in a group of entrepreneurs (7 of us) that get together each month and help each other with various issues that are going on in our business. We've been doing this for 3 or 4 years now, and I was in similar different groups prior to that. We've never officially said that we are each other's "advisory board", but these people know everything about my business - the financials, my hopes and dreams, the challenges I face, etc. Heck - they know more about my business than my wife does. We don't pay each other anything or have options in each other's companies.
Lastly, I'll say that sometimes you want to get a famous person on your advisory board - not so much for the advise but so that you look more legitimate. This person would typically want options and might only sign up to a very small commitment (like one phone conversation a quarter).
Jarie gave a great answer - one other fact. These options are Non-Quals v. ISO's; if you don't know the difference, in a nutshell, ISO's are for employees only. Non-Qual's have the following benefits: