Stop me if you have been in this scenario before. You have an idea for a new product, service, or software and you start to build a company off that idea. Everything is laid out--the framework, the business plan, everything. The only missing is some guidance on what to do next from someone who has been there before.
So then what do you do? At this point you would usually seek out a seasoned entrepreneur and ask them to be a mentor for your startup. Expertise isn't free, however, and when you're just starting out you probably have absolutely no idea how to put a price on it.
That's what I'm here to help you with. In this post I will help you determine how much equity you should give to a mentor.
FAST-track Your Founder-Mentor Agreement
A lot of startup founders get stuck at this stage. They realize that mentors need to be compensated, but they're unsure of how much equity to give.
You'll be happy to know that a solution has been developed by the Founder Institute called the "Founder Advisor Standard Template" (FAST). It's a free document that provides founders and advisers with a simple legal framework to formalize their relationship.
FAST has been developed in conjunction with the Orrick Law Firm and Silicon Valley entrepreneurs. I can tell you from experience that it couldn't be easier to fill out. Just add a few signatures and a couple of checkmarks, and you can decide with your mentor in a matter of minutes how you want to work together, and for how much equity.
This document specifically defines three levels of maturity in the mentor-founder agreement that a startup goes through: idea, startup, and growth. It also denotes three engagement levels that define how mentors will work with founders. Each level has a varying influence on how mentors will be compensated. They are as follows: standard, strategic, or expert.
Here's an example of how that would work. You go through a checklist and determine that your mentor does the following:
Using the FAST document, it would be determined that your mentor is providing a 'standard' level of engagement to your 'idea' stage company, making him entitled to 1 percent of your company in the form of restricted stock or options, vesting over a two-year time frame.
By comparison, if your company is in the 'growth' stage, that level of engagement would earn a mentor 0.6 percent.
One of the best things about this agreement is that it meets all the minimum legal requirements, but is still flexible enough for either party to end the relationship in as little as five days if things go sour. Traditionally it would take weeks to get in and out of those contracts.
Check out the full FAST document below, and then leave a comment to let me know what you think of this system and if it sounds fair for both you and your mentor.
The FAST Agreement