How Much Equity Do You Give a Person That Is More Than an Adviser?

Andrea H Special Projects Director

May 8th, 2015

I have a marketing expert that is extremely excited to advise This Dog's Life (.co) but wants to be more than an adviser. He wants a hands on role and has committed four hours a week to helping me. His usual consulting rate is $80-$100 an hour but said he could do it for $50 an hour (which for a bootstrapped company is still a lot). Anyway, he did bring up equity and was wondering what the appropriate amount should be?

Alec Tavel Entrepreneur, Senior Consultant

May 8th, 2015

Paving him with a convertible loan allows you to pay him gradually without the need to issue equity at the moment and having to value the company now.

Brent Wittke CEO, Co-founder at Resale Therapy

May 8th, 2015

Andrea,

Always a wide rage of opinions in this forum. When it comes to advisory positions, typically the advisors are excited to lend a hand, and hourly rates seldom figure into their compensation arrangements. My advice is to ask your attorney for a advisor agreement, very similar to a sub-contractor agreement. If your company is incorporated, and you have issued stock, you will be able to award shares.

Determine the length of advisory services needed (1-year, 2-years...) and agree upon a share quantity that you will issue as compensation for advisory services. Never, I repeat, never issue, or demonstrate the quantity as a % of equity. If the company issues new stock, or increases the amount of shares available, an agreement based on a % of equity would become unfairly overcompensated.

Example: When we incorporated, we created 1000 shares, we allocated 500 for issue to founders, angels investors, and consultants/advisors. a typical advisor providing 3hrs per week was granted 15 shares (3% of issued equity, but only 1.5% of overall) for 1 year of advisory services. We built in a vesting schedule, and triggers that would allow us to revoke share grant for non-performance.

Equity is a finite resource, don't squander it. Moreover, spend shares not % of equity.

Reach me offline if you would like a boiler plate version of the agreement I mentioned.

Brent

Julien Fruchier Founder at Republic of Change

May 8th, 2015

Zero. Equity at early stage is for founders and investors, period. This guy is not "more than an advisor", he's someone who's giving you a discount for work. He wants equity? He needs to earn it either with sweat (ie. no charge) or he needs to buy his way in with cash.

You may wan to talk to your lawyer about the long term consequences of giving out equity for things like discounts on marketing.

Jeremy Grodberg Web CTO & Software Architect - Available

May 8th, 2015

Typically advisors get 1-2% equity and no cash for 1-2 years of service, while consultants get cash but no equity. In my experience, cash+equity deals in pre-Series A companies for part-timers usually make both sides feel cheated.

I like Alec Tavel's idea of paying him with a convertible note. You are in no way ready to value the company properly to give him equity now and you don't know what his contribution will end up being to the company. You can always pay him more later but you'll have a hard time clawing back (or diluting out) his equity if he turns out to be a bad fit.

Bridger Jensen Owner & Founder at Venture Imagery

May 9th, 2015

Bridger's$.02:

I have a lawyer working on this for me now. I plan to offer an unknown software developer a part of my vision- all dependent on their contribution. Always think fairly, always think win-win.

Here's what I am doing. If someone wants equity, they can work for it - but I'm not paying them cash, they are simply sharing the risk. I suggest you don't pay him AND give him equity. If he want's BOTH cash and equity. He want to be part of the growth with no risk? Say no thanks.I wouldn't take the bait.

I'll pay someone, I offer equity for valuable services. But not both (that's a win for them, a lose for you). Anyone who shares equity in a company that has no cash flow must be sharing the risk.

If you feel you need to, then assess how much he is worth ($30-50 per hour x 4 hours per week). Then pro rate that against what you assess your company to be worth at the time he gave the work. Give it to him a bit at a time, dependent on him completing work.

1. Get everything in writing, 2. think WIN-WIN, 3. Make a "cap" off amount". 4. Document his contribution, 5. Write into your contract that he needs to finish. 6. Set quantifiable benchmark milestones to measure his progress by.

Bryan Stewart Founder at Media Stew

May 8th, 2015

Zero Equity. If you want his help, pay him. If you don't have $200 ($50/hour x 4 hours) then how can you be in a place in your business to know the real consequence of giving out equity?

Be VERY cautious about giving out % of your business.

Daniel Farmer Vice-President Sales & Operations at Baldgorilla

May 8th, 2015

It is hard to judge someone's interest in your start up. I work a lot with different early stage companies and I provide discount in the objective of building relationship and support them in the early stage. Then I might be able to hope for some future work at a more lucrative rate once they get the funding.

What I would say is if he is giving you 4h a week at a discount, then those hours are probably not sold at is full rate or else why would he cut is profit in half? second, since he already has time to spare and he is making 0$ for the 4h. its better to sell them at 50$h. In conclusion I would just hire him at that rate (rate that he agrees to witch means he's still making money) and tell him that if he is good and this picks up he will be the one you will contact in the future.

I think it was mention above, try to find the whats in it for both of you and it needs to be a win win.

Good luck!

Sergey Gladun CEO at Agilie, Design, Mobile Apps and awesome Websites

May 8th, 2015

+1 to Lawrence advice.

By my opinion if this person helps and his input deserves to be paid, you definitely have to follow. Use his normal rate, don't ask about the discount. It could harm the productivity.

David Schwartz Multi-Platform (Desktop+Mobile) Rapid Prototyping + Dev, Tool Dev

May 9th, 2015

I think anybody asking questions about how to split up equity needs to see SlicingPie. The book is an easy read, and their website is an incredible deal for tracking stuff.

Jordan Plosky Co-Founder and CEO at ComicBlitz LLC

May 9th, 2015

Just my two cents. You want someone who believes in the company enough to not want to drain you of your bootstrapped resources. I have 2 advisors, and am negotiating equity with another 2 currently. I think if you'll be going for investors down the road, you want to show that industry veterans believe enough if your company to work with you strictly for equity. I think it doesn't look as good if you tell investors you are paying someone, as it diminishes their value as an advisor.

If you are going to pay someone, are you sure this is the right person to pay? It might be time to keep looking for someone else, which may be scary, but you could also wind up with someone better, for exactly what you are looking to spend in either equity or cash.

If all you have is equity, then that's what you spend. Don't feel forced to change based on what someone else wants. You'll find what/who you are looking for if you give it time.

Good luck!

How Much Equity Do You Give a Person That Is More Than an Adviser?

Digital Marketing & Growth-Hacking