How do I give an advisor stock options?
EquityStock optionsAdvisors
An advisor gets a nonstatutory option under the company's equity incentive plan, approved by the board, priced at the current 409A fair market value, on the vesting schedule in the advisor agreement. The advisor agreement is signed first, because it defines the services the option pays for; the grant follows. Advisors are not employees, so incentive stock options are not available to them, and the grant relies on Rule 701's condition for consultants and advisors: a natural person providing bona fide services that are not about raising capital.
The advisor agreement comes first
The agreement says what the advisor will do, roughly how much time they will give, and what they receive for it. The equity line should describe the grant in the terms the board will later approve: the number of shares or a percentage of fully diluted stock on a stated date, the vesting schedule, and that the grant is subject to board approval and the plan. An agreement that promises shares without those words creates an obligation the company has not yet satisfied.
Vesting
Advisor grants usually vest monthly over one to two years, and a cliff is less common than in employee grants because the relationship is short and the value arrives early. Acceleration on a sale of the company is often asked for. Most agreements let either side end the engagement on short notice, at which point vesting stops and the option's post-termination exercise period starts.
How much
There is no standard. The amount depends on the company's stage, the advisor's involvement, and what the same time would cost in cash. Treat any published range as one person's opinion, decide what the services are worth, and record the reasoning in the board consent.
The grant
The board consent fixes recipient, shares, exercise price and vesting. The advisor signs the grant notice and the option agreement. At exercise, the spread is ordinary income to the advisor, reported as nonemployee compensation rather than wages.
Arabella's advisor agreement with equity compensation is written to feed the grant, and the option package supplies the grant documents.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.