Is FAST the new Lehman?

I really like the rationale for the FAST agreement. Startup founders without experience bringing on advisors often need help bracketing equity grants for those advisors, and often those negotiations take place before outside general counsel is retained and there is already a stake in the ground. The FAST approach uses a simple 3×3 grid to calculate the advisor’s option grant percentage: one axis is the level of involvement and activity, and the other axis is the development stage of the company.

The Lehman formula is an oft-repeated benchmark for calculating fees on a fundraising transaction or M&A deal. Developed in the 1970s, the formula has become overcome by events, mainly inflation. When bankers calculate fees on small M&A deals, in particular, they find inadequate compensation and have come up with alternatives to reflect current economic reality. By doubling the Lehman percentages, a $150,000 fee on a $5m deal (net 3%) instead becomes $300,000 (net 6%), a more realistic number in today’s market.

Here is the FAST grid:

  Idea Stage Startup Stage Growth Stage
Standard: Monthly Meetings 0.25% 0.20% 0.15%
Strategic: Add Recruiting 0.50% 0.40% 0.30%
Expert: Add Contacts & Projects 1.00% 0.80% 0.60%

I was using this the other day to start to ballpark a number for a project in which I might scale back my involvement. (I’m literally having that meeting 15 minutes from now.) If I do the proper microeconomic analysis and use a $100/hour figure for opportunity cost (as a lawyer who bills by the hour, that’s reasonable for a small number of marginal hours). “Expert level” advisory work is 2h/month, meaning 24h/year * 2 years, or $4800 of opportunity cost to me. If the Company will in fact be worth $1m cash at the end of that period, my 1% would be worth $10,000. But what are the odds of that? 50%? That lowers my expected value to $5000, and gives me a bonus 4% return on my investment. But at this stage, what are the odds, really? 10%? That lowers my value to $1,000 and tells me I’ve picked the wrong company.

Maybe I’m aiming too low. Let’s give this company good odds: it has a 1% chance of getting to be worth a billion dollars (and we’ll assume, to simplify things, that there’s no dilution of my 1% advisor stake – this is entirely unrealistic, but we’re just doing some estimation now). 1% stake * 1% chance * $1billion = $100,000 of expected value, a very good return on my $4800 investment.

So when does this work? The FAST numbers work much better when there are:
1. chances of a large valuation
2. lower opportunity cost (but no one wants advisors with low value to their time!)
3. Other sources of revenue, with either more certainty or lower volatility. For example, if the company also becomes a legal client and generates $10,000 in fees, that would go a long way to covering the opportunity cost and turning the advisory grant into a meaningful option. Of course, I no longer do legal work, so that option is limited to more traditional consulting work where “advisor” is no longer the best label.

What are your alternatives?
– only take advisory roles with prospective unicorns
– multiply the formula to get to a more reasonable value

I think that I’m going to settle at 5% for a board or expert advisor role as my personal benchmark and for the types of companies I typically come across here in the NYC area, outside the Valley. Fewer of these companies are really positioned, at the earliest stages when I meet them, to even evaluate their ability to grow huge. (Also I think the board version may be restricted to companies that provide D&O insurance, now that I think about it, but that’s a topic for another post.)

Leave a Comment