Startups are all about risk, so startup investment is based on identifying the startups which are successfully making themselves less risky over time. One of the most common (and investor-friendly) ways to derisk your startup is to build a diverse, well-rounded support network that can act as a major asset to your venture—aside from investors, these will mostly be your board of directors and your startup’s advisors.
If you find there are individuals whose experience can add value to your startup, you may want to consider formalizing their relationships to your company. However, this does not mean they have to sit on your board of directors. The board of directors is a structure strictly governed by the statutes of state corporate law and the company’s bylaws, and a board role is a large commitment with specific powers and responsibilities. It’s not an appropriate position for every person who can help your startup.
A startup advisor can supplement the skills and experiences of your founding team without the same level of commitment as a board member.
What is an advisor?
An advisor is basically anyone who can derisk your startup for investors by endorsing your venture and giving you advice. It’s up to you, the founder, to choose whose advice you seek. A person with substantial startup experience might fit the bill for one startup, while a well-connected industry insider or a business mentor may provide valuable assistance to another.
Picking advisors is similar to picking co-founders in that you should consider how their expertise will complement your team's strengths and weaknesses. Effective advisors may provide strategic advice, advanced industry experience, deal-making ability, investor connections, and/or name-recognition. For example, a young founding team with technical prowess may stand to benefit from a veteran founder or C-suite executive in an advisory role when it comes time to fundraise. Well-respected advisors can also be an important asset to a team during the investor pitch. It’s up to your founding team to have a strong idea and deliver a good pitch, but having the support of well-respected advisors can send a positive signal to investors.
Another consideration when choosing startup advisors is how you will work with them. Team chemistry should never be overlooked. It’s bad practice to connect with someone, and immediately onboard them into an advisory role. It takes some time to observe how advisors will mesh with your team and style.
What are an advisor’s legal responsibilities, and what are yours?
An advisor is a specialized type of independent contractor that serves the company and, specifically, the CEO. There’s also no mandate as to how many advisors you need. The advisor relationship is defined by the terms of an advisory agreement, a unique contractor agreement that designates the individual as an advisor, establishes compensation, and provides terms for the relationship. Because of the structure of most advisory agreements, you won’t have to worry about distributing additional non-disclosure or non-compete agreements to startup advisors. Provisions for intellectual property protection are typically included in the document.
Whereas a role on the board of directors has legally mandated fiduciary duties owed to the company’s stakeholders, an advisor is only obliged to the company and its CEO. Here’s how the role is defined in an example contract:
Your role will be to consult and advise Business 1 informally with respect to strategy, positioning, recruiting, and other items customarily undertaken by corporate advisors. In that role, you may attend in-person or online meetings, review plans, draft memos, make introductions, conduct industry research, and generally advise Business 1 on matters that come up from time to time as we build out our business.
You will report to me, Business 1’s CEO, and any other representatives appointed by me or the Board of Directors of Business 1 (the “Board”).
As an independent contractor, you will be self-supervised, work out of your own office on your own equipment as necessary, and work as many or as few hours as are necessary to accomplish your objectives. You are free to pursue other advisorships and engagements, subject to conflict avoidance provisions of this Letter.
The agreement requires that advisors occasionally make themselves available for meetings and inquiries, but does not require that meetings be in-person. Advisors usually serve the company through one-on-one relationships with the CEO, who might call them individually as frequently as weekly, or as rarely as annually. When working with multiple advisors, monthly or bi-monthly email updates and regular conference calls are also common.
Ultimately, you get what you put into advisor relationships. It’s your job to keep advisors engaged and aware of company developments. Without up-to-date information, startup advisors won’t be able to maximize their value to your startup. If you’re unwilling or unable to take reasonable measures to connect with your advisors, it’s not worth giving them an equity stake in your company.
It’s common practice for advisors to be compensated with a modest equity stake. Their relatively small time commitment to the company means that you will probably want to be conservative with these equity divisions—around 0.1% to 0.25% of the capitalization at the time of grant, and up to 1% in extraordinary cases. Advisor contributions are most valuable during the startup growth stage, so a typical agreement also establishes a 2-year vesting schedules with 0–3 month cliffs.
As with any equity grant, be careful giving up ownership of your company. Investors will be interested in your advisor relationships and may be discouraged if advisors have unreasonably large equity shares. Investors want to see that your advisors are committed, and vested equity certainly encourages that, but a suspect advisory relationship could be a red flag during due diligence.
How to bring an advisor on board
Thinking of bringing on a startup advisor? Gust Launch provides an easy-to-use advisor agreement workflow that allows you to draft and send personalized agreements with intellectual property protection, non-compete provisions, and equity compensation built right in. Even with this workflow, it’s good practice to consult your lawyer before deciding to onboard an advisor. With a strong, diverse team, you’ll be in a better position to grow your startup and derisk your venture for potential investors.
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This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.