Equity to an advisor

Anonymous

December 24th, 2013

I am in the process of setting up a fashion start-up and thinking about bringing advisors with industry knowledge on board. Since I have never had such an arrangement I have many questions: When and under what circumstances would you give equity to such an advisor? How much equity is adequate? How much "work" (i.e. time, knowledge, mentoring, contacts, etc.) could I ask for in return? Which legal documents do you recommend I sign with my advisor to clearly define responsibilities? etc.

Will Koffel Co-Founder at Outlearn

December 24th, 2013

I've been an advisor to many companies. For free, for cash, and for equity. I can vouch for the fact that it varies a lot. You need to establish what value you expect from an advisor.

If it's someone with a really deep rolodex in your domain, then giving them equity off the bat might make sense to incentivize them to drum up business partnerships for you, thus increasing enterprise value for all involved.

If you are counting on a technical advisor to help you launch and grow a product, you might do an equity arrangement whereby they receive a 1/4 point at each of 4 milestones.

Generally, advisors won't commit to a particular number of hours of work. Once you get into that model, it's a consulting arrangement. I've worked with companies where I was both a consultant and an advisor, but usually have done two separate independent agreements in cases like that, to keep the compensation for the advisory role separate from hands-on consulting work.

A good place to start for specifics on amounts and roles is the Founder Institute FAST agreement. I've seen more founders approach me with that in the past 2 years or so.

One last piece of advice: Talk honestly with an advisor. Brutal honesty and openness. Tell them what you hope to get out of their participation, ask them openly what their motivations are for helping you out. For an advisory relationship to really work, you have to have great communication and trust with the other person. Start off the negotiations that way. If there's any funny business, or the agreement is lopsided, then you're doomed to an ineffective and frustrating relationship from the start.

Detrick DeBurr

December 24th, 2013

Mike Moyer (http://www.slicingpie.com/)discusses the idea of using a Grunt fund to compensate advisors... He advises to develop an “advisory plan” that sets a fixed rate for an advisory board member’s time and a minimum number of hours before a slice of the pie is cut for them.

For instance, you could tell them that, as a member of the advisory board, they are entitled to a $200 Hourly Resource Rate starting after ten dedicated hours. So, when they hit ten hours they would get an equity slice equal to $2,000 of the Total Base Value of the Grunt Fund and they would begin participating as a Grunt.

Here's a sample letter http://www.slicingpie.com/advisory-board-member-letter/

Jacob Kojfman Experienced technology and corporate lawyer, focusing on SAAS

December 24th, 2013

Hi Guido, It's appropriate to give equity if you feel they can provide you with value. I've seen clients give between 0.5% and 2% equity. It really depends on what the advisor is bringing to the table. In terms of "work", my clients have had expectations of one meeting per quarter with phone calls/emails sporadically. An advisor will want to help you succeed but don't abuse the relationship and the time they give you. You'd want some sort of agreement setting out the roles and high level expectations, i.e. the number of meetings, etc. In particular, you'd want to make sure that this agreement has confidentiality provisions and that all IP created, including suggestions of ideas, belong to the company and the advisor will assign those rights to the company. Best to consult with a lawyer who can help you with this process. Good luck. Jacob Jacob Kojfman 604 318 4539

Lawrence Lerner Digitalization and Transformation Coach

December 24th, 2013

Guido, good topic and happy holidays to you!

I'll give you the consultant's answer, "it depends."

Advisors are just that. You are asking for some very specific advice and help in one or more areas of your business. The more specific you can make it, the more likely this person will be able to guide you or make the connections you need. More specific, should, equate to less but more high value time. This person probably has other things going. In my opinion, ten hours a months is a lot. More than that and it's starting to look like a paid role.

In terms of compensation, you may want to consider non-fund compensation as well. Is referencability important to them? Do you have a handle on great PR that you could do for them? How about your product itself? Can you make other introductions. In terms of equity, a few points it probably enough.

Good luck and let me know if I can help.

Lawrence Lerner Digitalization and Transformation Coach

December 24th, 2013

Here is a link to a document that may be useful. It's a document that I put together for a board role but there is some applicability http://revolutionaryinnovator.com/wp-content/uploads/2013/12/Sample-General-Board-Member-Description-07-2013.docx

Anonymous

December 24th, 2013

I personally gave 5% to a trusted advisor over a 1-year vesting period, but that was based on a very low valuation and for a (still) bootstrapped startup. I think we're sort of agreed on a target valuation of 1M$ so my advisor basically agreed to make $50K out of it. He told me he's been counting his hours, but lately he has worked way more than his $200 consulting rate (so in retrospect I realize he measured his expected ROI in terms of time spent advising me).

Note that originally he only asked for 0.5%-1% but I made him realize my company was a lot smaller than the startups he typically works with (and have already raised some funds).

To be 100% fair and straightforward, I would advise bluntly asking how much the advisor would like to make out of his commitment to you and then devise a good percentage based on a target exit valuation (exit for the advisor, not necessarily you, of course).

HTH,

Raphael.

Robb Miller founder at gnito

December 24th, 2013

Hi Guido. My friend Martin Ertl, founder of Contractual.ly, and a (Canadian) lawyer has a great open-source template for an Advisor Agreement on the Templates section of his service @ Contractual.ly (they make contracts easy). Sing-up is free, and you can check out the template (and many others) easily. Let me know if I can be of assistance in tailoring it for your specific circumstances. Cheers, Robb Miller @legalhacks

Maria Brandt

November 13th, 2014

When you are mentioning equity: 0.5% - 2% or more , do you refer to total issued shares, or total number of authorized shares? I was in a discussion with potential advisors, and this issue came up, where the advisor is trying to get 1% at exit at a certain evaluation. However, at this early stage, pre-dilution, that strategy means giving significantly more than the 1%. How do you handle these issues? Thanks