May 18 2006

How Many Stock Options Should I Give An Advisor?

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.