Stock Option Plan Rule of Thumb No. 5

Solidify Relationships from The Startup Garage
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This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.

Try Not To Jeopardize Relationships

Up-front communication of a director or advisor’s term of service and duties helps to foster a healthy relationship and facilitate a potential termination without jeopardizing relationships. For start-ups, relationships can be an incredibly valuable asset, and although a businessperson’s term of service to the company ends, he/she may remain a resource for years to come.  Importantly, the director or advisor’s tenure should be productive and the rapport built with one another should remain productive in the future.

Assigning duties can be tricky. Because directors have fiduciary duties, additional explicit duties do not normally need to be defined, although some companies have explicit director agreements. For advisors, I recommended that companies avoid too much specificity, but nail down the length of service and the option terms, include an indemnification provision, and provide for confidentiality in a written advisor agreement, the term of which may be terminated at any time. When expectations are clear, everyone is happier.


Ultimately, equity-based compensation should motivate independent directors and advisors by offering them a favorable, but fair, vehicle through which they can profit. Favorable conditions, such as a short vesting schedule and an extended post-termination exercise period, promotes director and advisor interest and keeps them driven. If used properly, a stock option or other equity incentive plan solves a number of problems at once: it helps preserve cash, it serves as a powerful tool for recruiting talent, and it offers a compensation structure that aligns incentives with interests and promotes dedication to growth and success. Establishing and administering a plan is not always easy, but with these five rules of thumb and a solid compensation strategy, everyone can succeed.

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About Tyler Jensen

I work with entrepreneurs who are looking to attract investment and get out of the "Garage". I am passionate about helping entrepreneurs start companies that matter. I helped launch over 100 Companies, Non-Profits and Social Enterprises. I consider myself a serial entrepreneur, startup coach & trusted advisor. * Launching New Companies (For Profit, Non-Profit and Social Enterprise) * Expert Business Plan Writer * Extensive Network of Business Relationships focused on Launch & Rapid Growth of New Companies * Startup, Growth, Marketing, Technology, Web, Business Systems * Trusted Advisor to CEO’s & Entrepreneurs * Capital Raising Strategy Development * Startup Team Development The first company I started and sold is VAVi Sport & Social Club which grew to over 25,000 members in six years, was recognized as San Diego’s 30th fastest growing private company in 2006 by the San Diego Business Journal and 32nd fastest in 2007, and sold for over 25X the capital investment.