So you’ve found the perfect advisor…wonderful! Before we shake hands and agree on terms, let’s prepare the right documents and decide on the best equity percentage for the relationship. We know…lawyers ruining the fun, yet again! You will thank us later.
Many early-stage to growth-stage startups exchange equity for consulting, advising, or mentoring services. Good advisors can make an immense difference in your startup’s success by providing you with strategy, industry connections, networking opportunities, and help on key issues you might face. These relationships are important, but should be thoughtfully developed and contracted for. A consultant or advisor relationship should be documented with:
- Consulting Agreement;
- This agreement outlines the terms of service for the relationship.
- Restricted Stock Purchase Agreement;
- This agreement outlines how much stock, the vesting schedule, and any restrictions.
- Board Consent; and
- This document expresses the Board of Director’s consent to provide equity to the advisor/mentor. This formality is important to legally record the board’s approval.
- Stock Certificate
- This is a physical piece of paper represents the stockholder’s equity ownership.
What to include?
The relevant documents should include similar defined terms and topics as those that arise for founders and when hiring employees. It is critical to specify the term for services; obtain IP Assignment and Confidentiality terms so that the Company is not susceptible to IP claims; provide termination conditions so that an ineffective consultant or advisor can be removed with ease, and; to clearly define payment terms and a vesting schedule for equity.
As to the size of the equity grant and vesting of the consultant’s grant, it really depends on how you view the relationship and how much time and effort the individual is contributing. In terms of market percentages, Brad Feld – in his book Startup Boards – recommends a grant to outside advisors in the range of .25 to 1 percent of the company that vests from two to four years. Also, see Mr. Feld’s post that 1% for an advisor is rich. Certainly there are super advisors that could justify a higher grant, but that’s the exception to the rule.
The Founder’s Institute recommends making advisory grants based on the stage of the company and the type of advisor. The below matrix provides a good rule of thumb for determining equity by the stage of your startup lifecycle:
Because every relationship is situational, there is no exact science or formula to decide equity percentage. Ultimately, the amount of equity comes down to a business negotiation. The considerations for vesting and the 83(b)election apply for advisors and consultants.
Overall, to gain value from an advisory relationship, your startup should prepare the above documents and determine a reasonable equity stake to offer the advisor in exchange for services.