Engaging an advisor is an important step for any founder of a startup. While many factors may go into a founder’s decision-making process when seeking an advisor, there are three factors in particular that founders should pay close consideration to when making this all-important decision.
Identify and Value the Advisor’s Contribution
Not all advisors will add value to a startup and those that do will add value in different ways. As such, a founder should closely scrutinize what and how much value an advisor will bring to the enterprise before bringing the advisor on. The type of value an advisor can bring varies greatly, from technical expertise in a particular subject matter to strong connections that will benefit fundraising. Knowing how an advisor will benefit the company will enable a founder to properly utilize, incentivize and monitor that individual as a resource. Further, external investors will often probe the role of engaged advisors during diligence, so a founder looking to raise angel, seed or venture capital would be wise to think critically about their advisory roster from the outset.
Look Beyond an Advisor’s CV
Many founders are drawn to advisors with CVs bursting with advisory experience and decades in the startup and venture capital industry. While these individuals certainly can and often do provide value to companies, founders should be wary of simply choosing an advisor on the strength of his or her CV alone; the quality of an advisor’s CV does not necessarily translate into output for a startup. A founder may find that an advisor with comparatively less experience but greater enthusiasm and availability will add greater value. The weight to attach to an advisor’s CV is closely tied to an assessment of the value such an advisor may impart. For example, an experienced but less hands-on advisor may add value simply by virtue of his or her name being associated with the company.
Ensure the Advisor’s Style Suits the Company
A founder should also appreciate that not all advisors will be a good fit for the company. Advisors can take markedly different approaches in their advisory style; for example, some can be critically aggressive and others more encouraging. A founder should choose an advisor whose style gels with the founder’s style and the culture of the organization more generally. A useful way of vetting advisory style is to carry out interviews and seek references from organizations the potential advisor previously advised.
As the saying goes, startups are typically equity rich but cash poor. Meaning, while startups cannot usually pay advisors handsome salaries in cash, the startup can offer equity in the company instead. startups usually refrain from issuing advisors fully vested stock at the date of grant as no financial incentive is created for continued time and support to the company. The form of equity normally offered to advisors is, therefore, common stock options that vest over a period of time.
Typically, advisors can be offered anywhere between 0.1% through to 1% of a company’s fully diluted stock depending on the stage of the company and the advisor’s value to it; equity tends to be higher for key advisers to early stage companies. A founder should once again analyze an advisor’s value to find an appropriate level of compensation.
Another key consideration for a founder is the period over which the options granted will vest. Typically advisor options are granted for anything up to a 24-month period, but the vesting period can extend for longer if a founder wishes, with a three-month cliff. The main reason for limiting the vesting period is that advisors tend only to hold their advisory positions for a couple of years and a founder will want to prevent vesting if an advisor is no longer adding value.
Once a founder has chosen the right advisor and decided on appropriate compensation, the next task is to paper the advisory relationship properly with relevant and robust terms. Below is an outline of the main terms to include in an advisor agreement:
- Appointment and Termination – Both the founder and the advisor are usually able to terminate advisor agreements at will. Advisors may push to attach a long notice period on the right to terminate, but typically any period up to 30 days is normal.
- Time Commitment – As previously mentioned, a term of 24 months for a vesting period is generally advisable, unless there is good reason to believe collaboration with the startup will last for longer. In cases where the collaboration is expected to be longer than 24 months, the term should mirror the vesting schedule set for any option grant.
- Roles, Duties and Key Performance Indicators – The advisor agreement should clearly outline the startup’s expectations of the advisor, for example, the expectation that the advisor make introductions to customers and investors or providing strategic advice. Where feasible, within the advisor agreement, it may be sensible to set out key performance indicators against which to measure the effectiveness of the advisor.
- Expenses and Fees – Typically the startup commits to reimburse advisors for reasonable out-of-pocket expenses incurred in connection with meetings they attend in their capacity as advisors. Some startups, however, feel more comfortable with requiring the board to pre-approve expenses or setting a cap on expenses.
- Confidentiality – Advisors are often privy to commercially sensitive and highly confidential information. Founders are therefore wise to include detailed confidentiality provisions to protect against leaks and dissemination of company information.
- Non-solicitation and Non-compete – The provisions most likely to generate push-back from an advisor are the non-solicitation and non-compete provisions. Founders have a legitimate right, however, to request that the company’s advisor will not solicit the startup’s customers, suppliers and employees, and that an advisor will not seek to compete with the startup. As advisors commonly hold multiple advisory positions at once, the non-compete provision in particular may require some discussion to ensure the advisor can continue to counsel others.
- Intellectual Property Assignment – While many advisors will not ultimately generate intellectual property in performing an advisory role, startups would be wise to include an assignment in the advisor agreement to head off any dispute over potential creation and development of intellectual property in the future.
Note the applicability and specificity of these provisions will need to be reviewed and tailored to reflect the particular advisor relationship in question.
Startups are wise to engage advisors, but founders should proceed with caution and careful planning when choosing the right advisors for his or her company. The preceding tips should help to facilitate a fruitful relationship between founders and their startup’s advisors.