These would be high-caliber persons who by nature of their association bring pedigree to the venture. These are persons listed on our website as being on a Board of Advisors, or as Team Members. They are often accustomed to receiving some kind of stock allowance or something, as I understand, depending on what they bring to the table. Is there a base? Obviously some might need some extra incentive.
I work in the medtech and biotech startup spaces, so what we see in these spaces may not be fully applicable to your needs. However, sometimes it's good to see what other industries do and possibly adapt those practices to your needs. Here's what I've personally seen, at least with medtech/biotech startups:
Again, these may not be applicable in your case, but these are all options that I've seen and personally used when outside expertise is needed for a startup. In the end, asking your advisors what level of commitment they can provide and what they would like in return for that commitment is a good starting point.
David, re read what I wrote. I said "Depends on the overall dynamic" And yes, if it is a top tier advisor 3% is not out of ordinary. To your point if it is more than 1% a vesting strategy could be wise if the advisor is middle of the road. That is for someone who is seriously contributing through not only advice but advancing the company. I have never heard of a startup company with 10 advisors. Not saying they don't exist, but for me anyway, that is way too many and brings up serious doubts about the competence of the core team if they need that many official advisors. Most companies I have dealt with at the MOST have about 3 or 4. And the advisors I know and think worthy of equity bring relationships and knowledge that are worth a lot of money. If we are talking about run of the mill advisors, I wouldn't even offer 1%. But if you are talking about advisors who are on boards of billion dollar companies, or are notable in their field...no way you insult them with talking about vesting 1-3% or compensating them with no equity but a percentage of sales. Real quick way to offend them and rightfully.
Up to 3% for being an advisor? With a board of advisors 10 deep (not uncommon) you've just lost up 30% of your company to a bunch of guys who aren't doing any of the work). That doesn't seem right.
I've heard some say offer advisors nothing. They get sweet finders fees for help making deals. It seems like as an advisors they should get 1st right of refusal to offer advice at a premium price of market value x 2. Seems like a pretty good deal for them. Obviously I don't value "advice" as much as those giving it.
It does seem however that if they bring pedigree just by being associated with the company they should get something ... but again, a percentage doesn't see right. Maybe vested shares of a certain value upon series A funding?
I did some more research on this and Founders Institute has a recommended advisor agreement (www.fi.co/FAST), and the % ranged from 0.15% to 1%, depending on a number of factors. I've decided to use this agreement. This seems far less than what we were talking about here, and upon further research ... the numbers in that agreement look pretty spot on. If however there is an advisor (sometimes called a marquee advisor) who carries a ton of clout you can add up to an additional 1% because they can add substantial valuation to the company ... saw if they double the valuation, then it may be a small price to pay. 3% is unheard of.
The founder's institute agreement could use a bit more information, so you might want to include stuff found on the upcounsel.com boilerplate agreement uphttps://www.upcounsel.com/advisory-agreement.
An additional reference worth checking out is from SiliconHillsLawyer:
He basically says you should cut the vesting time to 1-2 years, in which case you probably want to even drop the % a bit more (maybe by 1/3), with the possibility that the advisor can get that last 1/3 with a new agreement at that point. Also he recommends to have a 3 month cliff, and kick them off the cliff if they aren't performing within those first 3 months.
There's another lawyer who says these agreements are junk, but isn't very helpful how to make them better (he too also recommends a vesting period of 1-2 years): http://hyndmanlaw.com/blog/chances-are-your-startup-advisor-agreement-form-is-farkakte/. He's one of those attorneys who seemingly thinks that if a contract isn't totally enforceable then it's junk. I beg to differ ... formalities are important and agreements, at a minimum, establish expectations and rules of governance. Kind of like a seat-belt law. People don't always keep the law from fear of being caught, but because they define themselves as law abiding people.
For a non-executive/advisor who doesn´t do any work the absolute upper bound is 2% (I am/was such an advisor at two companies and would never accept more than that as it wouldn´t be for the good of the company). All shares are vested, cliffs are possible.
So you may go ahead with the Founders Institute´s range as you suggested.
@Dane Madsen et al
That´s a complex issue that can´t probably discussed without context. It depends on what the advisor brings in and how the company is valued.
I understand non-executive roles as not too time-consuming and ones that are not related to do any work. In my case, I mostly help out with contacts, I once supported in finding key staff, sometimes founders use the financial planning tool I have developed (for their pro-forma financial statements), I help preparing them for negotiation rounds, etc. To me, non-executive roles are more an “extended version” of mentoring which I do sometimes for free for people in my immediate environment (if we sit in a café once in a while and I can answer all questions instantly I don´t see why I should charge a fee). Whether it´s a non-executive role or mentoring, I always try to find out how he/she has treated people in the past in comparable situations.
I also don´t want to turn that into a financially meaningful business for me as that would hurt my consulting and other businesses. And I frequently reject inquiries if and when I feel that one is just looking for free consulting services worth multiple hours week. “Work for equity” is possible, though we´ll need to find another agreement then just because I “work” for equity.
But for a typical non-executive, I stick with the absolute upper bound of 2%.
David M - I've had some time to think about it, and I think you're basically right. And that's why one needs to be extremely selective when selecting advisors. Some do add that kind of value. There's mentors, and then there's advisors. The mentors are the ones who provide an advisor role, but don't necessarily bring significant value to the company. Then there are the advisors, which may be on a board of advisors, and have a visible presence, which actively participate on a weekly basis, making deals, introductions, can bring in investors en masse, brings significant clout. Those guys can be worth 3%, or even more. If they aren't doing that for you they're doing it for someone else where they're getting a similar incentive, because they're worth it.
As an adviser to several companies (currently and in the past), and at this stage I would not accept the role for less than 2%. New companies directly impact my consulting relationships and need to have long term value. More so, even with vesting, advisers are routinely crushed out in a financing. I have seen advisers who get zero for years of helping. For that reason, I have a non-dilution base as well (cannot be diluted below a number). Others here have called me out on that as a barrier to a financing, yet I have not had an issue with it to date. I am always willing to negotiate, but unless I put a stake in the ground, I could invest many hours (I am committed for 1-2 hours per week for 2 years) and see nothing, even if the company is successful. I agree with David that the number of advisers should not be more than 3 or 4 and each should have a different expertise.
Depends on the dynamic overall and the extent of their involvement. 1-3% is ballpark though.
But I think your thinking is right in the sense that if you have doubt of their value, then don't give equity. I have been fortunate to create very strong contacts, and I have seen their mere involvement lead to the startup gaining millions in funding. So for someone like that...maybe I offer 1.5, and leave room to bump up to 3%. So I can see your point about not offering equity to just anyone. My apologies.