How can a very early stage startup remunerate an advisor?


1

Here is the specific question:

I am a co-founder of a very early stage technology start-up. We have a good early level feedback on the nearly finished prototype(with a lot of features that we have already developed). We are right now, in the process of incorporation. My other co-founder and I have decided to split up equal of 37.5 % each with another 25% reserved for future investors and advisers. 

I recently met an angel investor who wants to be a part of the board of directors and wants a sweat equity of 2-3 percent. But he also wants a preferential right to invest in near future(3-6 months) where he gets the share at the same price as the co-founders. This gentleman is very experienced start-up veteran and has invested in lots of them before and as such we were happy to have him on board and also because of the great personal relationship I have had with him in the past. We are OK with him being in the board of directors and with 2-3 percent equity but I am not too sure about the third condition of investing in future and acquiring additional equity thereby.
We havent done very thorough finance reviews and are not sure what were are worth today or how the company should be evaluated.
Can we allocate stock options upfront on incorporation to the advisor and what should be the upper limit of the options in an ideal scenario. We definitely want to raise money in the next 6 months but dont want to give away much equity(at max 10 percent) to the said advisor.
Please suggest what could be an amicable partnership in this scenario.

Advisors Equity

asked Sep 14 '13 at 00:17
Blank
User2530668
6 points

3 Answers


2

Angel investors don't work for sweat equity. If you give him equity for free, then he is a partner not an investor. He could do nothing for you and still walk away with 2-3% of your great idea.

You have two options, get cash for his equity or give him options to buy equity at a set price and make them vest only when you raise funding that he brings to the table.

While he is trying to work deals, you and your partner still have 100% control, and if you don't agree to the deals he brings you, he gets nothing. However, if you give him equity upfront, he and your partner could gang up on you and do deals that you don't like.

Also, it is common for early investors to ask for the right to participate in all future rounds as a means to protect their stake from dilution. Future participation by early investors should be at the price agreed on for that round, and not tied to the price of a previous round. Giving them a better price will
scare away future investors and hold down the value.

Think of it this way, Would you invest your cash in a business for $10 a share if you knew another guy is investing in the same business at $5 a share?

answered Sep 19 '13 at 01:11
Blank
Tlueker
96 points

0

This is super-easy if you use a dynamic equity split which will allocate equity to your partners and mentors based on what they actually contribute. In this case you will have to rework your current fixed-split and apply the dynamic model so everyone will be treated the same.

answered Sep 17 '13 at 01:21
Blank
Mike Moyer
284 points
  • wow, thats interesting. Never heard about it before. Can you explain a bit more on how it works? – User2530668 6 years ago

0

What's wrong with giving him a "preemptive right" to buy a set percentage of future equity raises? Unless you don't want to have the guy as an equity owner, that's a common right to give to someone (but usually to an investor who already paid for equity before-not an advisor).

answered Sep 23 '13 at 09:22
Blank
City Entrepreneur
42 points

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Advisors Equity