Compensation Considerations

How to think about different compensation structures for engagements

Lawyers and their clients on the HeyCounsel platform are encouraged to transact in cash (either monthly fees or hourly) in equity, or a combination of the two. We outline the pros and cons of each below, along with additional considerations.

Cash Compensation

Cash-based compensation involves charging a fixed fee or hourly rate for your legal services. Lawyers on the HeyCounsel platform are free to set their own rates. You can choose to bill via hourly rates, fixed monthly fees, or a combination of equity and cash.

Advantages and Disadvantages regarding Cash Compensation for lawyers:

• Advantages: Immediate cash payment; no reliance on the startup's future success for financial reward.

• Disadvantages: No potential for long-term financial gains tied to the startup's success; startups may have limited budgets for legal services.

Determining an Appropriate Hourly Rate or Fixed Fee:

• Consider your level of expertise and experience.

• Research market rates for similar legal services. If you have questions on market rates, please contact [e-mail] and we’ll be happy to provide some additional context.

• Evaluate the startup's financial situation and budget constraints.

Billing Practices and Payment Terms:

• Invoices are due at the end of every month.

• HeyCounsel charges .15% platform fee to startups in addition to your final invoiced amount.

  • We do not charge anything for "Pass-thru charges" such as filing fees or other outside fees charged by government institutions or other third parties.

Stock Compensation

Occasionally legal advisors are paid with stock or stock options which will be the focus of this section. For equity compensation, we can look at a few established frameworks that are used by startups.

The "FAST" Framework

One is the Founder / Advisor Standard Template (FAST) by The Founder Institute, which is used solely for equity compensation:

🔑 There are three levels of company maturity in the FAST framework that influence the equity compensation: idea, startup, or growth. There are also three levels of engagement for an advisor that also influence the compensation: standard, strategic, or expert. For example, if an advisor provides an early-stage startup with an expert level of help by meeting with the team monthly, recruiting some talent, and taking a customer call, then that advisor will earn 1% of the company in the form of restricted stock or options vesting over a two year time period; while a similar level of engagement for a growth stage company is compensated with just 0.6%. The FAST equity compensation framework is outlined below, and examples of engagement levels follow.

Check out the different “advisor engagement” levels described in the Founder / Advisor Standard Template (FAST) by The Founder Institute for more information.

Another similar equity framework outlined by Eric Friedman of OnDeck is available here: An Advisor Equity and Advisor Pool Breakdown

"Typically folks get between .01-.25% for regular advisors, .25-.50% for mid range to expert advisors who are willing to spend the time, .50–1.0% for very special circumstances where you have someone that is deeply involved with the company and you might want to recruit later.

Advisors refer to these percentages as “basis points” such as “25 basis points” which equals 0.25%.

Carta's Data on Advisor Equity

Another great guide, produced by Carta (Source: The guide to advisory shares, Carta), uses market data to come to a consistent conclusion within the same .2%-1% range:

Advisors typically get shares of common stock, just like employees, which are subject to vesting during the working relationship. Usually they either get Restricted stock agreements (RSAs) – which are typically issued (sometimes at a small cost) when a company hasn’t raised much money or anything at all. Or non-qualified stock options (NSOs) – which is the right to buy shares at a predetermined “strike” or “exercise” price.

Many suggestions for the amount of equity to allocate individual advisors come from anecdotal experience. But at Carta, we have data that provides real insight into what’s actually happening. So we looked at advisor shares issued in 2019 for companies that have raised under $2 million. Here are the most common arrangements we saw: - Advisor RSAs: From 0.2% to 1% of a company - Advisor NSOs: From 0.1% to 0.5% of a company

RSAs appear to have a larger percentage because they are usually issued soon after incorporation, before there is any increase in the fair market value of a company. The earlier an advisor joins a company, the higher the fully-diluted amount they’ll usually be granted.

A quick note on RSAs (Restricted Stock) vs. NSO (Options).

RSA’s are only practical in the earliest stage of a company but they are preferred for a few reasons. First, they provide an opportunity for anyone earning shares to get better tax treatment early in the company’s formation. Because the share price is so low at the beginning (typically fractions of a penny), RSA’s allow people to actually buy all of their shares outright and not have to pay an exercise price later and potentially lose the options if they can’t afford to exercise. Because a person is buying the actual shares, RSA’s also start the clock for long term capital gains tax treatment right away. Vesting is handled by giving the company an option to buy all the shares back at the same price and as the employee or advisor works that option for repurchase reduces a bit each month until the company has no right to repurchase any shares. This produces the same result as vesting with options.

Looking at these and other frameworks, you will undoubtedly have to use a bit of art and science in determining exactly what you negotiate with the founders. Make sure that you understand the equity portion and that the number of shares in the contact are calculated correctly to represent the portion that you and the company have agreed to.

When done right, advisor-founder relationships are very powerful for a new company and the right advisors will add much more to the company valuation than the dilution that they create.

Vesting

A common vesting schedule for an advisor is two years with a three-month cliff. Advisor grants also typically have a longer exercise window post termination of service, and will usually have single trigger acceleration on an acquisition, because no one expects advisors to stay on with a company once it’s acquired. (Source: Holloway Guide to Equity Compensation).

However, you can customize whatever is appropriate and what aligns with what you'll be doing for the client. For example, you might be on a 6-month contract if your project is short term, or you might vest based on a specific milestone, like helping the company achieve a government approval, instead of vesting over time.

Even milestone based vesting tends to include a time based component to represent the effort invested toward the milestone. Make sure that vesting is monthly, with a reasonable 3-month cliff, and include a mechanism for vesting to be terminated if the relationship ends early. Remember, both sides can always extend or renew an advisor agreement if you want to test working together for a shorter time frame.

💡 When you receive compensation that vests over time, you will want to file an 83(b) immediately (no later than 30 days) following your grant. For more reading, see here.