Equity stake for advisor who came up with startup idea?

I realize this has been addressed in various forms before but I feel this case is unique.

How much equity would you give to a friend who came up with the idea for a startup but is voluntarily bowing out of a cofounder role (to be an advisor only)?

A friend of mine ("Sam") came up with a good idea for a startup. He brought me (the tech guy) and another guy he knows ("Eric", expert in the vertical) together to be cofounders. He's helped us negotiate a partnership/cofounder agreement (worked on legal docs), spoken with angels/VCs (has a lot of contacts there), and kept things moving as much as possible.

Sam is in a completely unrelated field (healthcare). He realizes he doesn't have the vertical knowledge or contacts, and isn't a tech guy. So he doesn't want to be cofounder. He just wants to help in any way possible. He's been working on the idea for about 5-6 months (not full time), probably 3 months or so with Sam before I came on.

So far this is just an idea, with some software I'm writing and no investment (not even seed). Sam's proposal for equity split is about 40% each for cofounders, and 15% for him as advisor.

My first reaction is that this is high compared to other advisor agreements. However, this situation is different since it was his idea originally and him bringing us together that made this happen.

Thoughts?

vvvv Update vvvv

Currently the agreement is that Sam will be the first in line to get diluted as needed to carve out additional option pools for initial employees, strategic advisors, etc. When we get to a funding event we will see what the VCs have to say about current allocation and be prepared to adjust as necessary.

Food for thought - For comparison, here's an interesting guidepost: Accelerators like YC, AngelPad, Techstars, etc usually provide around $10K-20K of cash, physical space to work, access to experts and previous participants on a daily basis, and access to every VC and Angel in the Valley.

Their take? About 5-6%. I'm wondering (not rhetorically) how that compares to the work that Sam has done so far.

Sam will recognize that he can't insist on anything at all. But it would be plain unethical to fail to recognise his pivotal role in getting you to this point, and the suggestion looks totally reasonable given the story.

In fact, in slightly different circumstances, Sam could be hiring Eric and you to execute on an idea of his - in which case you might be grateful to enjoy a double digit shareholding, let alone 40% or so!

In terms of benchmarking, you should consider the 15% to be made up partly from his prior contribution, and partly from his ongoing involvement. You may well want at some stage to engage other advisors, mentors or board members, so you could have a 'same side of the table' conversation between the three of you so in that event you already have an idea of the equity you would offer.

One benefit from securing Sam's ongoing commitment is that you and Eric trust him individually and as a mediator. That could pay dividends when the two of you have important decisions in future. Co-founder disagreements can wreck promising start-ups, so Sam is a great insurance policy as well as a point of connection with the original vision.

As a final comment, shareholding is rather less important than creating value. It's possible that a future investor will want to rebalance the holdings. That's achievable routinely - and you're not in the more highly charged position where one co-founder plus one advisor has a controlling interest.

It sounds like Sam did a lot of work to get the idea off the ground, which warrants cofounder status in my book.

If it's just three of you who founded the company, then 15% seems reasonable to me. There are plenty of examples of cofounders who get things going and then leave, so it's not uncommon.

It seems like a fair deal.

So if Sam took 0% that would leave you with 7.5% more equity than what he is proposing. Would you risk his good will and the contacts he has and one of the driving forces for that?

You are making too big a deal out of it - you have 40%. Before he came along you had nothing...

If he had just mentioned the idea to you over drinks, and you took the ball and ran, that would be a different story. But he has done a bunch of the ground work and helped you through some initial hurdles.

I know I would prefer to lay a lot of the tasks and background work on someone for 15%. It sounds like even though he is "hands-off" he will still be providing value.

If you force him down to 10 or 5 percent he will likely resent it and then you would probably not see any more help come from his corner.

Even if it turns out to be high - you might have only gotten 5% more out of it for your end. Is it worth risking at this point?

What makes you think that 15% is too much for him?

EDIT -- after the edit in the question about YC and its stake

You can't compare YC's stake at all. It is not apples to apples. You are too concerned about "what things look like". YC is just setting some across the board policy that leaves plenty on the table and also gives them some real equity. Note that they DO NOT get any board seats or preferred shares, etc. They give only nominal help - the cost for them for all that stuff is a pittance. Do not compare your participants/investors with YC. It just isn't useful at all.

Consider also that a tiny fraction of companies even get to participate in YC (or other similar incubators) - so whatever comparisons or assumptions you try to make just won't fit.

Don't try to match your company's equity structure to VCs/Angels before you even get going - just worry about it when/IF you actually have investors willing to give you money.

You are worrying about the wrong things right now. "Sam" actually provided value already and is likely to keep doing it. You are/were trying to take away his reward without even having a real entity in his place.

Startup (the beginning) is a very delicate time (paraphrasing from Dune here). 90% of $0 is still $0. 100% of your cut of $0 is $0 too. It does seem like Sam did a lot of prep work and knows people who might help. Sometimes it takes a single connection to the right person to determine life or death for a fledgling startup.

My advice to you will be to give him what he wants and let him run with it. In the end, you may all benefit from it. Don't risk losing that important link over premature quarrels over percentages of nothing (currently).

15% could be worth very little if anything at all if the business does not succeed. Sounds likes he has great ideas/contacts that could be very valuable for your venture and even future ventures. If you think you can go it alone al the way further you can put up a fight.