Oct 1 2011 by Brad

Warrants In A Deal With An Advisor

Question: I am a startup about to receive a convertible loan investment. My friend has been advising me on an adhoc basis re. the financials on a barter basis with me. Now he’d like to formalise his agreement with the company. He has made his money as an entrepreneur and now travels alot but will be available for consultancy for us. His deal feels harsh: 1) he’d like to consult for 2 days a month at £1,000 per day. He travels alot so, this would be around his availability etc etc 2) he’d like to be paid not in cash (we can’t do this) but ‘via warrants’ priced at the same price and on the same terms as the deal done with our first round financier. He has stated that any entitlement to warrants earned cannot be revoked upon any subsequent termination of the contract by me. 3) He’d like to be a ‘commercial manager’ with a lot of involvement in the business exchanges with other professionals (something I’ve done to date) but I feel it’s too heavy-handed at this very early stage of the business. Please could you explain what ‘warrants’ mean?

Valuing his work in the first 12 months at £24,000 (2 days per months @£1,000 per day) at the same as our financier would mean he’d get approximately 5% of the company. This seems high for us. I wonder do you have any thoughts on an alternative proposition? We have raised investment for the first 7 months of business. And we’ll have to raise more immediately. To date, my friend hasn’t made any introductions here and doesn’t intend to. He sees himself more as a ‘safe pair of hands’ for investors with his background in finance. What would be a better deal to expect from a professional with this sort of experience to bring to the company?

Your friend is essentially asking for the right to invest at the same price (known as the “exercise price”) that your financier is investing in. The amount of warrants he is asking for is mathematically linked to the amount of time that he’s working based on his day rate.

While it’s a strange ask, it’s not inappropriate. Another way to look at is that he’s asking for the right to invest £24,000 in your company on the same terms as your investor. So he’s not actually getting equity, just the right to buy it at a later date. The terms associated with this matter – if the time he has to exercise the warrants is long enough (say 10 years) then it’s likely he’ll never have to shell out the money to actually buy the stock. Instead, when the company is acquired (or goes public) he’ll get the difference between the share price at that time and the exercise price of the warrant.

It sounds like your post money valuation is around £500,000 (if £24,000 is about 5% of the company). Another approach would be to simply offer him warrants for a percentage of the company that feels good to you for his contribution. If you feel 2% is adequate, rather than him earn the equity monthly, just make him a grant of 2% in warrants on the same terms but vest them monthly over a year.