I gave stock to an advisor who isn’t doing much, should I let him go?

QUESTION:

I brought on a high-powered advisor for a considerable amount of stock, which vests over 4 years. But the advisor isn’t adding much value, and it’s been nearly a year. Should I let the advisor go? This advisor is well-known in the industry, so I don’t want to make enemies.

ANSWER:

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

I assume that you’re thinking of terminating the advisor before his one-year “cliff” vesting date, so that he gets no equity. From a legal perspective, the danger is that he will claim you took advantage of him, terminating him right before the cliff so as to get all of his good work and not pay him for it. I know that’s not what’s going on, but that doesn’t prevent him from thinking it, working himself into a rage and suing you. If the original grant and the termination are well-documented, that suit should eventually fail. But it might not fail quickly or cheaply and it could possibly succeed. While it persists, it puts the company’s cap table into uncertainty, which could complicate financing transactions and acquisitions of the business. The more equity on the line, of course, the higher the stakes for you and the advisor and the harder your choice. Bear in mind that the economic value that makes it hard for you to give him the equity also makes it more likely that he will sue, whether or not he has a good case.

The upshot is that you should think carefully about whether you want to terminate him before or right after the cliff. If you choose before, get an employment litigator involved in advance to help you think through how to do it in the most defensible way (e.g. by properly documenting your reasons).

Legalities aside, if you terminate someone very close to the cliff, you’re very likely to make him angry. It sounds like you don’t think he shares your view of his performance, which raises the risk. So if you’re worried about making him your enemy, terminating him right before the cliff is a bad idea. In this regard, you might take a look at what Fred Wilson posted recently on this topic here: http://www.avc.com/a_vc/2010/11/employee-equity-vesting.html. His view (as a VC!) is that it is generally poor form to terminate someone close to the cliff. The advisor is likely to share that view.

One other thing to bear in mind. Although it may gall you to give the advisor equity, doing that will give him an ongoing stake in your success. If he is well known in the industry, that’s worth something. At very least, it might keep him from badmouthing you around town to justify his departure. By itself, this upside isn’t usually a good enough reason to give someone equity, but it’s there, so you might as well play it for what it’s worth and take some comfort in that.

Before you think through the costs and benefits, try to put aside your frustration, no matter how justified you are, and to take a realistic view of how the advisor will see your actions and respond, no matter how unjustified he will be. Justice can be very expensive. Peace is often cheaper and sometimes profitable.

I hope this helps.