As the founder of a new business, it can be difficult to know which issues to tackle first. Areas such as fundraising, technology, strategy and networking will all compete for your attention and you may not be experienced across them all. You need to know what you don’t know and engage an advisor whose strengths lie in your areas of weakness. Advisors can guide you through the initial startup phase and also during other significant milestones in the history of your business (e.g. product launches and crisis management).
Who should be my advisor?
• Expertise: It’s very tempting to seek out a megastar mentor or advisor to publish on your website or in your investor deck. But these people are extremely busy and are unlikely to be able to devote time to you – even if they wanted to do so. Instead, seek out advisors that are experts in the same field as your business or who can provide with you expertise you’ll know you need but won’t be able to hire for in the medium term. Ideally, your mentors will have experience with scaling companies and the challenges they face.
• Credibility: Engaging one or two advisors who are respected in the startup community can give you credibility as a first-time entrepreneur who may have limited relationships and experience. These advisors can add value simply by having their name associated with the startup, even if they don’t perform a very active advisory role.
• Compatibility: Think about whether a potential advisor will take an approach that fits with your startup: do you want someone who will be encouraging or does your business need someone to be objective and often take a critical stance (i.e. someone to poke holes in your strategies)?
• Valuation: Investors will examine your advisors and their role within your business prior to investing in it. You should consider carefully how your business will benefit from having the advisor – is it their network and potential fundraising benefits or technical expertise that you are missing? Being able to value the input from the advisor will allow you to make full use of the advisor and compensate or incentivise them accordingly.
How can I afford an advisor?
The good news for founders is that advisors to startup businesses generally offer their time and expertise in return for equity in the company, rather than cash compensation. But to ensure there is continued motivation for the advisor to support your company, consider using share options which vest the shares over time. There are two key aspects to this arrangement:
• Amount: The number of shares will depend on the founder’s perception of the advisor’s value to the business. Key advisors to early stage companies will generally command more shares than an advisor brought in for a bespoke project or task for a more mature company. We typically see advisors being offered between 0.1% to 1.5% of a company’s fully diluted shares in this region
• Vesting period: As a founder, you want to ensure you only compensate the advisor if they continue to add value to your business over time. Advisor options are generally granted for a period of up to 36 months. These options also include a “cliff” period: a trial period during which there is no vesting of shares. If the business and the advisor part ways (e.g. through the company terminating the advisor’s engagement or if the advisor terminates the relationship) during the cliff period, the advisor will not get any shares in the company. Cliff periods of three to six months are commonly seen.
What else do I need to think about?
• How will you continue to use the advisor going forward? Generally speaking, advisors will provide their best advice during a particular phase in the life of your company (e.g. during the initial startup period, a financing round or the lead up to a product launch) and are less likely to be adding value once your business has moved beyond that phase or milestone. Ideally, the vesting period would align with the “value add” period but, if the vesting continues after the useful life of your advisor’s engagement, you’ll need to terminate the relationship with the advisor to stop the vesting. This may be an uncomfortable decision for you if your advisor is a trusted mentor or friend.
• Acceleration: If there is a sale of the company, some advisors may request acceleration of the vesting process, i.e. the shares will vest at a faster rate than the one set out in the vesting schedule. Such a request should be considered carefully and reviewed by your lawyer to ensure that this acceleration cannot result in an unfair outcome for you and your company.
• Same terms: Advisors talk to each other. Using similar terms across all your advisor agreements means you are less likely to find an advisor who feels disappointed with their arrangement with your company. It also makes your housekeeping more straightforward.
What do I need in my Advisor Agreement?
The relationship between a company and its advisor should be documented in an agreement. The agreement will cover both the commercial arrangement and the option terms. The following key terms should be included:
• Confidentiality: Protect your company’s confidential information from being shared or otherwise used by the advisor.
If you’d like to know more, please see PROTECT my business for more information on confidential information.
• Intellectual property rights: Most advisors won’t generate any intellectual property when performing their advisory service but it is sensible to include an assignment of intellectual property rights to avoid any disputes in future.
If you’d like to know more, please see PROTECT my business for information on intellectual property rights.
• Non-solicitation and Non-compete: As a founder, you wouldn’t want your advisor poaching your employees, customers and suppliers or setting up a competing business using your ideas. If your chosen advisor is an advisor to several other businesses, these provisions will probably need some negotiation if these arrangements are to continue.
• Vesting: Align the vesting period of the shares with the likely length of time that the advisor will be adding value to your business. Every company goes through stages that require different types of skill sets from their advisors. The advisors you have in place on Day 1 are unlikely to be the same advisors that the company needs at the five-year mark.
• Termination: Ability of either party to terminate the agreement. Often immediately upon written notice to the other but some advisors may request a notice period.
• Services and performance levels: Clear statements of what the company expects of its advisor and the level at which it must perform. For example, “Making introductions to potential investors” (service description) and “Not less than four new introductions each calendar month” (performance level).
• Expenses: Companies tend to reimburse advisors for reasonable out-of-pocket expenses incurred when performing the services (e.g. carpark charges while attending a meeting). Companies can maintain some control and visibility over these expenses by requiring prior notification and/or pre-approval limits on expenses.