21 May 2020
As a founder of your new venture, it can be a daunting task to gauge which issues you need to address and tackle first.
It may sound very tempting while seeking out a rock star mentor or an advisor to publish on your website or in your investor pitch deck. But remember, these people are extremely busy and are unlikely to be able to dedicate their time to you – even if they really wanted to do so. Instead of that, try seeking out advisors who are experts in the same field as your venture and who can provide you with all expertise you will need to know need but you won’t be able to hire them in the medium term.
Ideally, your mentor must have relevant experience with scaling companies and the challenges that come with it.
Engaging with one or two advisors who are much valued and respected within the startup community can give you the credibility as a first-time entrepreneur who may have limited relationships and experiences.
These advisors can add great value simply just by having their name associated with the startup, even if they don’t really perform actively at an advisory level.
Just think whether this prospective advisor will take an approach that will fit with your startup. Do you need someone who will be encouraging you or does your business need someone to be objective and often take a critical standpoint i.e. someone to poke holes in your strategies or be your devil’s advocate?
Investors will generally scrutinize your advisors and the role they play within your business before investing in it. You must carefully consider how your business will benefit from having an advisor – is it their potential fund raising benefits, network or their technical expertise that you are lacking? By being able to value the input from the advisor, it will allow you to make full use of the advisor and then incentivize or compensate them accordingly.
The great news for all the founding member of the business is that generally most advisors to the startup businesses offer their much valued time and expertise in return for equity in the company, rather than any cash compensations. But in order to ensure that there is continued motivation for the advisor in order to support your business case, consider using company share options which vest the shares over a period of time. There are basically 2 major aspects to this arrangement:
The number of shares will totally depend on the founder’s opinion of the advisor’s value that he/ she would bring to the business. The key advisors coming in to early stage companies will usually command higher shares than an advisor who is brought in for a bespoke project or a task for a more mature company.
Typically, advisors will be offered anywhere between 0.1% – 1.5% of a company’s fully diluted shares in this space.
As a founder, you only want to ensure that you compensate the advisor if they continue to add great value to your business over a period of time.
Advisor options are usually established for a period of up to 36 months.
These options also include a certain cliff period i.e a trial period during which there is usually no vesting of shares. If the business and the advisor part ways for example, through the company terminating the advisor’s commitment or if the advisor terminates their relationship during the cliff period, the advisor will not get any shares from the company. Cliff periods are commonly seen between periods of 3 to 6 months.
Typically, once the advisors are on board, they will provide their best advice during a particular phase in the life of your company which could be during the initial period, maybe a financing round or even the lead up to a product launch but with time they are less likely to be adding any value once your business has moved beyond that phase or those milestones. Generally, the vesting period would align with the value add period but, if the vesting continues even after the constructive life of your advisor’s commitment, you’ll need to end the relationship you’re your advisor to stop the vesting.
This might be an uncomfortable decision for you if in case your advisor is a trusted mentor or a close friend.
If in case there is a sale of the company, some advisors may even request acceleration of the vesting process, i.e. the shares will vest at a rapid rate than the one set out during the vesting schedule. Such a request should be considered very carefully and reviewed well by your lawyer to ensure that this acceleration cannot result in any unfair outcomes for both you and your company.
Advisors usually talk to each other. Using similar terms across all your advisor agreements means that you are less likely to find an advisor who feels dissatisfied with their arrangement with your company. It also makes your housekeeping more straightforward and to the point.
The relationship between a company and its advisor should always be documented in an agreement. The agreement usually covers both the commercial arrangement and the option terms.
This agreement is made to protect your company’s confidential information from being shared or otherwise used by the advisors.
Most advisors won’t create any intellectual property when carrying out their advisory roles but it is prudent to include an assignment of intellectual property rights to avoid any disputes in near future.
As a founder, you would never want your advisor poaching any your customers, suppliers, employees or setting up a competing business using your ideas. If your chosen advisor is also an advisor to several other businesses, then these provisions will probably need some sort of negotiations if these arrangements are to be continued.
Align the vesting period of the shares with the likely duration of time that the advisor will be adding a certain value to your business idea. Every company goes through a stage that requires different types of skill sets from their chose advisors. The advisors that you have in place from the initial setting up days may not be the same set of advisors that the company will need at their five year mark.
Appointment of the advisor to provide services to the company, clarifying that the relationship is not in the lines of an employer or an employee.
The ability of either of the parties to terminate the agreement.
This is done more often immediately upon submitting a written notice to the other but some advisors may choose to request a notice period.
Mention clear statement of what the company expects from its advisor and the level at which it must perform.
1. Making introduction to potential investors – As a service description
2. Not less than four new introductions each calendar month – At a performance level.
Companies tend to repay advisors for a reasonable out-of-pocket expenses incurred when performing the services for them. (e.g. Car park charges while attending meetings).
Companies can even maintain some visibility and control over these expenses by requiring prior notification and/or pre-approval limits on the expenses.