One repeated question I receive working with start-ups out of the gate is how much equity is appropriate to issue to advisors. The answer to that question requires an understanding and analysis of a number of circumstances, including, by example, the identity of the advisor, services to be provided, length of term of engagement, stage of start-up, to name a few. Recently, however, I came across an interesting form advisor agreement which provided a methodology and helpful set of metrics for founders to set the boundaries for an advisor grant based on somewhat objective criteria. Here is the matrix that was provided:
With the advisor performance level determined using the guidelines below:
And the company stage determined using the guidelines below:
A few key takeaways:
1) In my experience and based on what I am seeing in the market, the matrix's assignment of an equity grant to an expert advisor is quite high at 1%, 0.8% and 0.6% respectively. Typically, outside extreme cases, advisor grants very rarely head north of 0.5%.
2) I find that start-ups have a tendency of applying unrealistic goals for advisors and in some cases vague critera for performance. Above all in the above methodology, I like the objective nature of the performance metrics.
3) No matter what, don't forget that advisor grants should still be subject to vesting!