Comments on: How Many Stock Options Should I Give An Advisor?

By: mike S

mike S — Mon, 22 May 2006 18:25:32 +0000

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!’

By: Brad Feld

Brad Feld — Fri, 19 May 2006 16:48:52 +0000

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.

By: Jason Wood

Jason Wood — Fri, 19 May 2006 13:47:30 +0000

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.

By: Brad Feld

Brad Feld — Fri, 19 May 2006 08:09:03 +0000

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?)

By: Brad Feld

Brad Feld — Fri, 19 May 2006 08:04:59 +0000

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.

By: James

James — Fri, 19 May 2006 03:40:19 +0000

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.

By: Jason Wood

Jason Wood — Fri, 19 May 2006 02:51:23 +0000

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.

By: Dan Marques

Dan Marques — Thu, 18 May 2006 18:35:41 +0000

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

By: Brad Feld

Brad Feld — Thu, 18 May 2006 16:51:50 +0000

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

By: Rick

Rick — Thu, 18 May 2006 16:41:43 +0000

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