Once upon a time, Swedish tech entrepreneurs had very few role models to engage as advisors in their startup journey. But that was a long, long time ago. Nowadays, there are lots of experienced founders and industry experts out there, who are willing to help other entrepreneurs.
Until now, there hasn’t been any standard for how to compensate advisors. By publishing this SWEAT (Startup Warrants for Engaging Advisors Template) guide and documents, I hope to minimize the thresholds, costs and headaches for entrepreneurs to engage advisors, and for advisors to more actively help founders.
In short, this is how SWEAT works:
- Establish a consulting agreement between the company and the advisor, with market-level compensation. The advisor must have a limited company (in Swedish it’s called aktiebolag but it should work with a limited company in any country).
- To compensate the advisor, the company issues warrants (Swedish teckningsoptioner) to the advisor, for the same total value as the consulting services.
- The advisor buys the warrants day 1, and invoices the company quarterly.
- The warrants come with a warrant agreement, implementing e.g. vesting and drag-along.
When the advisor purchases the warrants (step 2), the company gets liquidity which they can use to pay the invoices from the advisor (step 3). The advisor will effectively lend money to the company during the engagement period, but this is hard to avoid since it would be too complicated and expensive to issue warrants to the advisor regularly. It’s much simpler if the advisor buys all warrants day 1.
Please note that the SWEAT model does not work for board engagements since according to Swedish legal precedent, board members can only be compensated with (or at least taxed as) salary, but it may work for board members who in addition to the their normal board role, also act as a consultant to the company.
Speaking of tax implications, if you are concerned about this setup, please read the tax information (in Swedish) provided by our tax lawyer Erik Björkeson at DLA Piper. If you have any further tax questions, please contact him. If you have questions about the legal documents themselves or need non-tax-related advice, as usual you should contact Mattias Larsson.
How much equity?
It’s up to you. For reference, Founder Institute has put together a standard for defining commitment levels called FAST. In short, in the idea stage of the business, the advisor gets 0.05% for committing one hour per month for 24 months. In startup stage, the number is 0.04% and in growth stage it’s 0.03%. Of course these numbers are just benchmarks and you need to agree on expectations and compensation.
Using the FAST standard, this is what you get depending on commitment level and company stage:
|Standard (5 h/month)||0.25%||0.20%||0.15%|
|Strategic (10 h/month)||0.50%||0.40%||0.30%|
|Expert (20 h/month)||1.00%||0.80%||0.60%|
Example: You have raised a small angel round and launched an MVP but you don’t have lots of revenue (i.e. you’re in startup stage) and you have found an advisor willing to commit 5 hours per month for 24 months. You would then give that advisor 0.20%.
For more details about the different stages and what to expect from the advisor, see pages 4-5 in the FAST template (although the legal document itself shouldn’t be used in Sweden).
How SWEAT works
Disclaimer: This web site and the documents that can be downloaded from here contain general information, which is not advice, and should not be treated as such. The information is provided “as is” without any representations or warranties, expressed or implied. I’m not a lawyer or a tax advisor and even though I’ve done what I can do minimize any legal, financial or tax risks, I obviously take no responsibility for how you use the documents. Even though I’ve used SWEAT a couple of times myself, and know many others who have as well, you should always talk to a lawyer and/or tax advisor before implementing.
As mentioned in the summary, SWEAT consists of two parts: a consultancy assignment where the advisor agrees to help out with expertise a few hours per month for two years, and warrants which give the advisor the right to purchase some shares after two years.
Let me describe how it works in more detail.
SWEAT consulting agreement
The consulting agreement may seem unnecessary, but it’s great is for tax reasons. Defining the scope of the engagement and pricing it as a consultancy makes it more obvious that the advisor is not engaged as an employee or a board member but as an expert consultant (assuming that’s true, of course).
The advisor will invoice the company quarterly during the two-year period. Also, the agreement states that the company shall issue warrants to the advisor worth as much as the consultant’s total commitment.
Let’s assume that you have agreed to give the advisor 0.2% of the company in exchange for appr. 5 hours/month during the coming 24 months. You would then calculate the fair market value of those 0.2% (e.g. 50 kSEK if company valuation is 25 MSEK), divide it by 0.794 (for tax reasons, see below) and use that amount (~63 kSEK) in §5.1 in the SWEAT consulting agreement. (The hourly fee in §5.1 would then be ~63 kSEK/24 months/5 hours ≈ 525 SEK/hour.)
Eliminating income tax effect
Why divide by 0.794? In order to eliminate the 20.6% Swedish company income tax (as of 2021) effect for both the advisor and the company. If not accounted for, the advisor would lose (and the company would gain) 20.6% of the value in next year’s tax declaration since the consultancy is taxable income for the advisor (and deductible cost for the company).
The standard solution, as implemented in the document templates, makes the company issue a little more warrants to the advisor to cover the tax effect. In the example above, the advisor would instead get 0.2%/0.794≈0.25% of the company, worth ~63 kSEK (instead of 50 kSEK). In this standard case, with the numbers from the example above, the flow looks like this:
- The company issues 0.25% worth of warrants for 63 kSEK.
- The advisor transfers 63 kSEK for the warrants to the company’s bank account.
- The consultant invoices one eight of the 63 kSEK (~7.9 kSEK) after each of the following eight quarters.
Don’t want that extra dilution?
If you really don’t want to be diluted by those additional 0.05%, you can instead pay the tax compensation in cash. This is often the preferred way if the company has good liquidity. If this is what you want, you just append “multiplied by 0.794” to the end of §6.4 in the SWEAT consulting agreement. With the example numbers from the example above, the flow will be:
- The company issues 0.2% worth of warrants for 50 kSEK.
- The advisor transfers 50 kSEK for the warrants to the company’s bank account.
- The consultant invoices one eight of the 63 kSEK (~7.9 kSEK) after each of the following eight quarters. (Yes, this amount is higher than the value of the warrants in step 1, since this is where the tax compensation happens.)
To issue the warrants, the company needs a general meeting to approve the SWEAT terms. These terms and conditions apply to all warrants issued at the same time. It has official status and will be registered with Bolagsverket (i.e. it’s public!). This is also the reason why it has to be in Swedish (with English translation). The other warrant document (the SWEAT warrants agreement) is a private agreement between the company and the advisor and must be signed with every advisor.
You just need to fill in the blanks in the document. It should be pretty self-explanatory. It may be worth mentioning that the maximum number of warrants in §2.2 is the total number of warrants you are planning to issue to all advisors combined. If you’re unsure of how many advisors you’ll sign, you can always set this number slightly higher than you think is necessary. This way, you won’t have to convene a new general meeting if you find an additional advisor.
SWEAT warrant agreement
With each advisor you also sign an individual SWEAT warrant agreement, stating the number of warrants, price per warrant etc. This agreement is also where you implement e.g. drag-along (the company can force the advisor to sell the warrants in case of an exit) and vesting (if the consulting agreement is cancelled for whatever reason, the advisor must return the not yet earned warrants).
The warrant agreement is even simpler than the terms. The company will sign one warrant agreement per advisor and append the SWEAT terms to the agreement. I just want to point out a few things:
§3: Right of first refusal
Just like in most shareholders’ agreements, the existing shareholders have the right to purchase any equity instruments (shares, warrants etc.) before any third party may buy them. If the advisor gets an offer to sell the warrants, they must first be offered pro rata to the existing shareholders.
§4: Redemption right
This is often referred to as vesting. It basically means that if the consulting agreement is terminated for whatever reason (both the company and the advisor has the right to terminate it at any time it without cause), the company has the right to buy back some warrants from the advisor, for the same price as the advisor purchased them. The number of warrants the advisor can keep is proportional to how many months have passed (out of the full 24-months period).
There is also three months cliff, meaning that if the relationship ends within three months, the advisor doesn’t get to keep any warrants.
§5: Right and obligation to sell
In case of an exit where a third party wants to acquire the majority of the company, the company can demand the advisor to sell the warrants to the acquirer. Also, even if the company doesn’t make such a request, the advisor has the right to sell in this situation. This is similar to a tag along and drag along in the shareholders’ agreement. The price per warrant would be the same as if the advisor first exercised the warrants and bought shares, then sold the shares.
§7: Shareholders’ agreement
The advisor is not a shareholder and is therefore not a party to the shareholders’ agreement. However, when exercising the warrants and subscribing for shares, the existing shareholders’ agreement must be signed.
Assuming that you have prepared the SWEAT documents and are ready for signing, you need to follow all the usual corporate formalities when issuing warrants. You will have to summon both a board meeting and a general meeting, and you need to submit documents to Bolagsverket. Follow the link to read more about the process with Bolagsverket. I’ll summarize it below. In the downloadable document package you will also find templates for the necessary meeting minutes.
- Hold a board meeting. First, the board must make a suggestion to the shareholders to issue the SWEAT warrants, see Board Meeting Minutes (Proposal to GM) and Board Meeting Minutes (Proposal to GM) Appendix 1. Appendix 1 also refers to the SWEAT Terms. All the mentioned documents can be downloaded below.
- Hold the GM. Next, a general meeting (annual or extraordinary) has to vote for issuing the SWEAT warrants, see General Meeting Minutes. Please note that it refers to the board proposal in Appendix 1 so make sure to attach it.
Instead of making the decision of who gets how many warrants directly on the GM (which is most straightforward), you can instead let the GM authorize the board the mandate to sign new advisors continuously during the coming months. If you choose that path there will some more paperwork and you need to make some changes in the GM and board minutes, see Bolagsverket. The mandate has to be registered with Bolagsverket immediately, see latest registration document version at Bolagsverket (document no. 824). Don’t forget to pay the registration fee.
- Sign subscription list. When the GM has decided to issue warrants to the advisor(s), they have to subscribe for the warrants (i.e. confirm the purchase of the warrants) by signing the subscription list Warrant Subscription List. If more than one advisor are subscribing, they can sign the same subscription list or separate lists. Nowadays, subscriptions list are not legally required but are included in the StartupTools templates since it’s still common and might make the process more straightforward.
- Pay for warrants. After subscription, the advisor has to pay the price of the warrants, according to instructions from the company.
- Confirm subscription. The board confirms the subscriptions. Use Board Meeting Minutes (Confirmation).
- Notify Bolagsverket. You must inform Bolagsverket of the issue, see Bolagsverket’s web site for template 826, and pay the registration fee. They need to know that you have issued warrants but they don’t care to whom.
Firstly, thanks for putting this together – it’s super helpful!
In the paragraph titled “SWEAT consulting agreement” what are you defining as fair market value for the 0.2%. Is it the value of the company? Or, the hourly rate of the consultant?
Hi Jamie, I was referring to the company’s fair market value. (However, using the SWEAT model, this should be more or less the same as the aggregated hourly value of the advisor, as the compensation for their time is the 0.2%.)
Hej Erik, is the requirement for the advisor to have have a limited company means that needs to be a Swedish AB? Or can it be a limited company equivalent in another country (US for example)?
Hi Pablo, thanks for your question! I don’t see any reason why it would have to be a Swedish limited company. Everything is made on market terms, so as far as I am concerned it should work in all jurisdictions, but just in case perhaps you should ask someone who knows the tax regulations of the advisor’s jurisdiction to verify.
Hi am I crazy or has this changed / it used to be that the consultant invoiced the full amount from the get go, not quarterly over the period? Thanks
Hi Tomas, you’re right! It changed earlier this year due to getting too complicated to account for all possible situations where it may be a tax/legal issue that the company pays out a big chunk of money to a stakeholder. We don’t know of any case where it has caused any such problems, but we want to be sure that it works for everyone.
Got it many thanks Erik!
Hi, and thank you Erik & team. To avoid having the advisor pay for the warrants upfront, could the company issue a loan to the advisor for the warrants which is paid back through the invoices?
Planning to use SWEAT to compensate a consultant abroad with money + warrants.
The setup of issuing a loan to that purpose is unclear from a legal perspective, I suggest that someone should assess it to see if it would be suitable for this particular situation.
Using the SWEAT in a cross-border situation is not what it was originally designed for, and therefor I would suggest anyone who wants to use it in this way to receive legal assistance with it. If it works or not will be very dependent on the other jurisdiction it interacts with.
If I understand this correctly, the advisor has to pay for all the shares up front and pay with their time? That sounds like a very good deal for the company but a bad one for the advisor. Why would they not just invest instead? That why they just pay for the share but don’t have to give any time.
Yes, and no. So the setup works the way that the advisor pays for the warrants, and then as they spend their time helping the startup, they invoice regularly (quarterly) in a pre-agreed schedule which is balanced so that at the end of the  month cycle – they have received their money back and have the warrants – and so the startup has received the help, transferred the warrants to the advisor and have none of the money.
Very appreciated information.
How much would the valuation affect the benchmarks in different investment stages?
I’m glad you like it.
There is no 1 correct answer to that question, but we suggest you think of it in terms of what market value price for the help would be (for example what would you pay this person per hour if you were to pay in cash), and then see what the total lands on for the expected total and convert that into an equity stake at your valuation.
Best of luck!