Structuring Advisor Option Grants: Key Considerations for Startups

For many startups, attracting experienced advisors is an essential step in building expertise and credibility. Advisors bring unique business and technical insights, often lending their time in exchange for equity through option grants. However, structuring these grants effectively can be nuanced, balancing the interests of both the advisor and the company. Here’s a look at some important factors to consider when setting up advisor option grants.

1. Vesting Schedule: Monthly, No Cliff

Unlike employee grants, advisor vesting schedules typically don’t have a cliff and are set on a monthly basis. This flexibility accounts for the often shorter-term, project-specific nature of advisor roles. A typical vesting period ranges from 12 to 24 months, with the exact number of options reflecting the advisor's involvement and criticality.

For instance, startups might grant an advisor anywhere from 0.15% to 0.75% of the company’s fully diluted stock, vesting monthly over the agreed period. This percentage is influenced by factors such as:

• Activity Level: How much time and support the advisor will provide.

• Importance to the Company: How essential the advisor’s guidance is to the company’s success.

• Company Stage: Early-stage startups may offer larger equity stakes as they have fewer resources.

Vesting periods beyond 24 months, while possible, may not be ideal. Advisors often add the most value during specific growth phases, and a company may outgrow its need for a particular advisor’s expertise over time. If the vesting period is extended beyond this timeframe, startups risk continuing grants even after the advisor’s active engagement wanes, potentially creating awkward dynamics if the company needs to end the vesting arrangement.

2. Exercise Period: Flexibility for Advisors

One often-overlooked aspect of advisor option grants is the exercise period. In most option plans, advisors have three months after termination to exercise vested options; if they miss this window, the options expire. For advisors, exercising options within this timeframe can be challenging, especially if they lack the funds to pay the exercise price or face potential tax liabilities.

Advisors, who receive Non-Qualified Stock Options (NSOs), can sometimes negotiate a longer exercise period. Extending the exercise period can be a substantial benefit to the advisor, allowing them to wait for a liquidity event before they need to make the financial commitment of exercising their options. However, companies may prefer shorter exercise windows to limit equity dilution.

One way to maintain a positive relationship post-termination is to proactively remind advisors of the three-month window. Companies can consider sending a notice with the termination date and details on the remaining exercise period. This courtesy can prevent misunderstandings and disappointment if options expire, helping preserve relationships with valuable mentors and avoiding potential disputes over termination dates.

3. Equity Consistency Among Advisors

Equity granted to advisors should be thoughtfully allocated to ensure fairness. It’s not uncommon for advisors to compare equity grants, which can lead to disillusionment if they feel they’ve been treated inequitably. While there are no strict rules, maintaining consistency—especially for advisors brought in at similar company stages—can foster a positive environment. For unique or specialized advisory roles, companies may still vary terms based on the value and rarity of the advisor’s expertise, but clear communication can prevent misunderstandings.

Conclusion

Setting up advisor option grants involves more than simply issuing options. By thoughtfully considering vesting schedules, exercise periods, and consistency across advisor arrangements, startups can create option grants that attract and retain valuable advisors while aligning with long-term company goals. Thoughtful structuring of these terms minimizes potential pitfalls and helps maintain productive, positive relationships with advisors, supporting the company’s growth trajectory and fostering mutual success.

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