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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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How Many Stock Options Should I Give An Advisor?

Comments (15)

I received the following question recently:

Just want to ask you a question. I’m looking to bring in a couple of advisors for my startup, how much stock and the approximate % of equity should I give that’s fair to the advisors for their invaluable advice? I was thinking of 100,000 shares each that equates to 1% company equity. Can you advice me on what’s the norm?

1% is rich.  In the past, I’ve given some ground rules for equity grants for directors – 1% vesting over four years is at the top end of the range.  Advisors typically (although not always) contribute much less value to a company than directors and their equity grant should correspondingly be less.  Of course, the amount you give depends on a number of factors, including things like your expectation of what the advisor will provide, how much you value this involvement, and the existing capital structure of the company (e.g. larger grants if you are younger, smaller grants if you are a more mature company.)

Usually, you’ll be granting stock options (non-qualified stock options – “non-quals” or NQSO’s) to the advisor.  As a result you should think through vesting carefully.  Many advisors contribute much of their value early in the life of the relationship so rather than giving a grant that vests over four years, you might consider making an annual grant and then revisiting things in a year to see if the relationship is living up to expectations.  A savvy advisor will prefer to get a bigger grant that vests over four years since it will allow them to lock in a strike price at today’s fair market value (FMV) of the stock (which – in the success case – will likely be lower than the FMV in the future).  At the minimum, this will facilitate a conversation about revisiting things annually to make sure everyone’s expectation is being met with the relationship.

  • http://tachophobia.com Rick

    What about stock options for a key employee, or several key employees, at the start of a company?

  • http://www.feld.com Brad Feld

    Rick – good question – I’ll blog on this in the near future.

  • http://startupguide.typepad.com Dan Marques

    Or the short answer…as little as possible while still retaining their assistance.

  • http://woodrow.typepad.com/the_ponderings_of_woodrow Jason Wood

    Brad,

    Another hypothetical for you. What if the advisor is providing services several years into the lifecycle of a portfolio company? In other words, you fund a company and it’s looking like one of the weak sisters in your port; so either you or the company management bring someone in to fix things/troubleshoot.

    In your experience, what kind of equity participation does that warrant and how, if at all, can you tie in the compensation to equate to the success the turnaround advisors help foster?

    Jason

    P.S. You should’ve joined us at the Blogger’s Corner, it was a blast on many levels.

  • James

    Perhaps 1% – 1.5% per advisor isn’t rich, however, if a key advisor or two can permit a company to avoid both raising venture capital and/or forming an official board, both of which are time consuming and very expensive in equity. More companies in the tech space now have a shot at reaching profitability without ever raising money from a VC… if they know what they are doing, and the right advisors may be able to give them that knowledge.

  • http://www.feld.com Brad Feld

    Jason – I’d separate between “an advisor” (who provides advice but doesn’t do much actual work) and someone who comes in and spends real time with the company. The more time, the more active involvement, the more equity! The upper bound is probably 5% as that’s the norm for bringing in a new full time CEO.

  • http://www.feld.com Brad Feld

    James – you are correct. There are certainly cases where advisors are worth more than 1%, but they are rare. If the advisor gets actively involved in helping the company on a real time basis, especially early in the life, and has a real track record of helping young companies, they might be worth more. Interestingly, many of the “great” advisors are willing to invest some money as an angel investor also – I’ve found this is a good filter (e.g. in addition to getting some equity for helping out as an advisor, are you willing to be an angel investor?)

  • http://woodrow.typepad.com/the_ponderings_of_woodrow Jason Wood

    Brad — Thank you. Any thoughts though on how to measure the equity award? In other words, at the time of engagement (for a turnaround or revitalization process), would you recommend a range of potential equity awards at current terms based on some pre-defined goals?

    Some colleagues are developing an advisory capital (to borrow Tom Evslin’s term) business but are struggling with a way to define how much equity they should be entitled to in the upfront negotiations.

    J

  • http://www.feld.com Brad Feld

    I definitely establish the amount up front. I’d try to keep it simple – I personally don’t like performance based grants because they (a) have icky accounting issues, (b) often devolve into subjective stuff, and (c) end up being a source of confusion / contention. My recommendation is to figure out the grant up front, treat it like any other equity grant / negotiation, come to terms with it, and then go build some value.

  • mike S

    I am pretty interested in the answer to Ricks question too.

    Just so you can say ’2 people are interested, I’ll write about it!’

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