Advisor Equity

Assigning warrants to advisor/fundraiser

Austin Pate Research Associate at American Institutes for Research & MSc Analytics Student at University of Chicago

February 2nd, 2016

An ex-banker who's been informally advising my venture is now planning to raise seed funds for us (the target raise is $900k for 28% equity). He's asking to be paid in warrants. I take it that he wants his stake in the company to be proportional to the amount he raises (is that correct?)

What's a fair amount to offer this guy?

Robert Lee

February 2nd, 2016

I typically use the Lehman Formula as the cleanest way to compensate brokers for funding. It does two things: 1) It validates their legitimacy because most professional fundraisers know and understand what it is and 2) it helps establish a clean compensation agreement with those looking to raise funding for your business.

It's basically a 5-4-3-2-1 formula starting at a 5% fee for raising the first $1 million and 4% for the second million etc. This can be in any combination of cash and/or options/warrants. The idea of options/warrants is a win-win insomuch as they won't have to pay taxes on it until they exercise them and if there's a capital gain.

I've also run into my share of greedy idiots (as many here can probably also relate to!) who insist on huge fees (often up front) with absolutely no guarantee of performance. And the worst are the ones who make promises while asking for "consulting fees" from the outset to which I would tell you: Run - Don't Walk Away from People Like That!

NOTE: Keep in mind I'm not a lawyer or financial advisor. But I did find a good 2-page sample for you to look over:

Max Avroutski Building EV Charging & Electric Energy Access company

February 3rd, 2016

I also have to say that selling 28% of equity in one go is a bad idea and negative signal to experienced investors. 10-15% each round should be maximum, rarely should you agree to 20%, but only if investor is willing to pay premium for that extra 5-10%

Paying on performance requires him to be registered broker/dealer - ask him if he is and verify.

If he is not, then Adviser's 0.5%-1% vested over 2-3 years with 12 month cliff. Adjust to your situation. He has 12 month to "advise" and if you like results after 12 mo he gets 33-50% of his adviser equity. If he didn't do enough before 12 month you renegotiate equity or cancel the rest of agreement and pay nothing.

He would have to trust you not to screw him on 0.5% because you will be trading on your reputation and if he really has connections it will hurt you if you do.

Ask securities lawyer if this will work.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

February 11th, 2016

The Lehman formula is tried and true. I have seen many companies use it over the years. Warrants are not that unusual either. I assume that the banker will be bringing you individuals rather than an angel group or VC fund. In many states fundraisers are regulated or not permitted at all. You and your company will be legally responsible for any representations that the genlteman makes about your business. Best to develop a specific written presentation and agreements with appropriate exculpatory language before you begin the fundraising process.   

Faisal Memon iOS Department Technical Lead at Citrix ShareFile Quick Edit

February 2nd, 2016

Warrants are suitable for later stage financings, not seed stage financing.  One reason is that it makes the accounting and subsequent investment rounds more complex.  Later investors won't be happy with the warrants because if the value of the company is driven up, the warrant holder gets a bigger allocation of proceeds during a liquidation event.  There is a natural tension between the size of investment an investor will make versus the dilutive effect the investor will tolerate.  Its therefore best practice to maintain a separate stock option pool for management and employees which is managed and topped up as each financing is made.  Advisors would take say a 0.5% stake from the option pool typically.

In the seed round, I would expect 10 - 15% range taken by investors.  Your target raise sounds high also.  Depends on the business.

Another thing puzzles me is that you are incentivising to raise more money whereas the better long term strategy is to raise the minimum you need for the runway to get to the next milestone because then you get money on better terms.

I am not your financial nor legal advisor, so you are not able to use these comments as actual investment or legal advice.

There are some finance gurus on this site.  I'd be interested in their comments.

Marcus Spillane Serial Entrepreneur and experienced Finance, Investment and Business Development Executive

February 2nd, 2016

Hey Austin
That is probably right. Anywhere from 1% to 4% likely though it could be higher depending on who he is and how hard he negotiates.

David Pariseau

February 2nd, 2016

I believe warrants are just options that are issued by the company and are in this case synonymous?  Someone, correct me if I'm wrong about that, but assuming he is getting paid in options you're essentially giving him a percentage of the company (regardless of what he raises, unless you make stipulations on what he has to do to in order to earn the options, (e.g. secure x $ in funding)).  As to what is fair that depends a lot on what he can secure from his contacts vs. what you could secure on your own.  That delta is the likely value (in my view) and then you have to figure that he's done and the hard work will then be growing the company to make it worth something for everyone.  So, typically advisors or key outside folks get a fraction of a % for their roles, the actual amount a function of their experience and value to the company.

Corey Schwartz President at

February 3rd, 2016

I'm not expert in options or warrants but I believe that issuing options or warrants for services may be considered non-qualified deferred compensation and trigger a need for a 409A valuation. You should also check to make sure that the payment doesn't trip over securities laws for  paying an unlicensed broker dealer.

Joanan Hernandez CEO & Founder at Mollejuo

February 3rd, 2016

Robert & Max comments are important.

Allow me to twist this. This ex-banker has some contacts right? And I would assume you want to make a business, right? Can the ex-banker help you to get customers instead of investors?

I would think this might be a more profitable endeavour for both of you, instead of getting investors and later try to find a market for your business, which in the end is what you're looking for, correct?

I would think that later, once the business is up & running with customers, it should be easier to raise funds to grow. By that time you should know for real the value of the business.

My 2 cents.