This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.
Issue Options According To Value Added And Risk Taken
Options are often issued as a reward, either for services rendered or risk assumed by the recipient. Thus, the number of shares and ownership percentage covered by the award to a director or advisor should depend on the value added and risk assumed.
It can be difficult to assess the intangible value of certain directors or advisors, and although a high profile individual is generally awarded a larger option package, the industry credibility and networking opportunities a director or advisor offers are not easily appraised.
However, one can approach this problem from a different angle. Instead of searching for the right percentage, an alternative is to focus on the expected payout. Most true outside directors are looking for an opportunity to make a million dollars over a five year period. Therefore, instead of thinking about the number of shares or percentage ownership, start with the end figure and issue accordingly. As far as advisors are concerned, the same technique is used with a lower payout.
Compensation also depends on the prospects of the company, how far along the company is, and the track record of the founders. This all goes to the company’s likelihood of success—the higher the likelihood of success, the less risk there is to compensate for.
In any event, a director’s take typically falls between one-half of a percent and two percent, and an advisor’s between one quarter of a percent and one percent. In each case, the company’s needs and the qualities of the prospective director or advisor drive the analysis.
Check back Wednesday, September 26, for Rule of Thumb No.3: Subject Director And Advisor Shares To A Two-Year Vesting Schedule.