How To Do It!

Key Point: start with a good form of agreement. There are many examples on the Internet. If you need one, you can call me.

  1. We will send you our example Advisory Board Agreement for you to review. You will want to give some thought as to how many shares or options to grant the advisor, and whether you want to pay your advisor any cash amount as well or reimburse certain expenses, etc.
  2. Remember the tax differences between stock awards and stock grants.
    1. Stock awards are either taxable at grant (if fully vested or an 83(b) election is made) at the fair market value of the stock at the time of the award (this can be an unexpected and expensive tax hit), or taxable upon vesting (if no 83(b) election is made). If the stock award is not taxed until vesting this can cause problems as well, because by the time the shares vest their FMV might have increased, and the tax owed at that time will be based on the FMV at the time of vesting.
    2. The nice thing about stock options is that they are not taxed at grant or vesting as long as they are priced at FMV.
  3. Once you determine whether you want to grant options or stock, and the amount, you can have the Board approve the equity award. All equity awards have to be approved by the Board. (Make sure you have room in your stock option or equity incentive pool, of course.)
  4. Before you get too excited, you need to know where your advisor lives. The reason? You have to confirm Blue Sky compliance (see below).
  5. Finally, don’t forget Rule 701 (your federal securities law exemption)

What is Blue Sky?

Key Point: This isn’t too difficult. Don’t be too alarmed. Your law firm will have a 50 state guide, and can quickly check. But the point it is–don’t forget this piece.

Blue Sky is what prompts your lawyer to say the thing that you never want to hear your lawyer say, such as:

“Before you can do that, we need to do some research. You may have to fill out some forms and pay a fee.”

For example, in California, you generally should not be granting stock options unless you have filed a Form 25102(o) and paid a fee. Each state has its own Blue Sky, or state securities. For stock options, or compensatory stock awards, it is not enough to simply have a federal securities law exemption. You have to have a state securities law exemption too. This requires you to examine each state’s law. For example, if you have an advisor in Boston, the state may want you to file a form there. In Washington, if you are granting options other than pursuant to a stockholder approved plan under which ISOs can be granted, you generally have to make an advance filing with the Washington Department of Financial Institutions.


Documenting an advisor relationship does not have to be difficult, or too time consuming, but it is important to do it right. Key things to do:

  1. Work from a good form of advisory board agreement
  2. Have your board approve all equity awards
  3. Comply with federal and state securities law
  4. Watch out for state securities law filings