Equity Compensation for Startup Advisors: X Hours a Week or Project-Based

Understanding the Advisor-Client Relationship

When advising startups on a certain number of hours per week (X hours) or on a project basis, the relationship often resembles that of a contractor rather than a traditional advisor. The advisor is expected to put in hours, but the focus shifts toward achieving specific project goals rather than long-term strategic advice. The consultant receives compensation based on the hours worked or the project completion, rather than a fixed contract or advisory agreement.

Equity Compensation as a Motivation Strategy

To incentivize advisors, offering equity can be a compelling approach. In exchange for their loyalty, expertise, and time, advisors can see a share of the startup's success. This can be particularly effective when the advisor brings specific skills or connections that are valuable to the startup.

However, the traditional financial mechanisms like SAFE agreements and convertible notes, often tailored for investors, may not be the best fit for equity compensation due to their structure and potential negative accounting and tax implications. SAFE agreements, for example, are not designed for small passive owners and can create issues when used as a form of compensation.

OPTIONS FOR EQUITY COMPENSATION

There are two primary options for equity compensation: common stock and stock options. Each comes with its own set of benefits and challenges.

Common Stock: This is the simplest form of equity compensation. Advisors immediately receive common stock, which can be advantageous if the startup rapidly increases in value. However, it requires a proper stock structure and board approval, and it can have significant accounting and legal implications. Stock Options: Advisors are granted the right to purchase common stock at a predetermined price. This can be more flexible and is often preferred for shorter-term projects or advisors with fluctuating workloads.

Setting Up the Vesting Schedule

To ensure that equity compensation is aligned with the advisor's efforts, a vesting schedule is essential. This is the process by which the advisor’s equity stake in the startup gradually becomes fully owned (vested) over a specified period. Common practices include:

Monthly Straight-Line Vesting: The advisor earns a portion of their equity each month, typically over a 24-month period. Any unvested shares are repossessed if the advisor leaves before the vesting period is complete. Accelerated Vesting: In cases where the advisor's performance exceeds expectations, or they put in extra hours, additional equity can be granted. This can include single-trigger or double-trigger provisions, which accelerate vesting under different conditions.

Legal Considerations and Documentation

Setting up an equity compensation plan for an advisor involves several legal and financial considerations. It's important to have a well-drafted agreement that covers all aspects, including the number of shares granted, the vesting schedule, and any triggers for vesting. While some services now offer DIY tools for equity compensation, it's often advisable to consult with a lawyer to ensure that all legal and financial rules are followed.

In summary, when providing equity compensation to advisors for startups, it's crucial to choose the right model based on the specific needs of the startup and the advisor. Whether through common stock or stock options, the vesting schedule must align with the advisor's contributions, and proper legal and financial planning is essential to avoid potential issues.