Recruiting a great advisor (or team of advisors) might be the most important step for any start-up.
However, most start-ups fail to bring top quality talent to the table because they don’t know how to approach these people with a deal that incentivises them to truly get involved.
This page is designed to give you the tools you need to land an all-star advisory team.
What is an Advisor?
First things first, an advisor is not a mentor. A mentor is someone who you meet with for coffee every once in a while, and although they provide immense value, they can’t really get into the details. Mentors are great for high level direction and guidance.
An advisor is someone you are compensating to be a part of your business.
Whether they are helping you wade through a complex licensing agreement, giving advice on software engineering or helping you source a manufacturing partner, an advisor has been there, done that and is at the table to help you get through it to.
And this is where most entrepreneurs get hung up, they don’t have a black and white offer to take to a potential advisor.
What you will find below is a set of tools that will allow you to draft a compelling offer and ensuing legal agreement for you team of advisors. This team is going to save you time, make you more money and share in the ups and downs of your start-up.
It’s time to take your start-up team to the next level.
Types of Advisors
Do you need advice, introductions, or investment? If so, an advisor might be the right thing for your business. Start by asking yourself what you are looking for in an advisor. What do you need to help take your business to the next level? Here are a few types of possible advisory roles.
Oracle / Sage
Knows your business/industry
Has worked with organizations of a similar size
Has experience dealing with challenges you face (eg. Offshore Manufacturing, Products vs. Services based business model)
Can provide you with a connection to a key client or investor
Has connections with key influencers in your industry
Now you know why you need an advisor and which type you are looking for, but how do you get one?
Beg, borrow, and steal? No really.. there is no silver bullet for this one.. You must always be cultivating your formal and informal network of advisors. It’s a continual effort and it never stops. Who do you have now that can help take your business to the next level? If you’re thin on “advisory capital” then take these steps now:
- Reach out to your network and if you don’t have a network
- Get a network then see step 1
Seriously though, if you are starting at square one, then start cold calling. Build your network and surround yourself with people who are smarter than you, then ask for their advice. If people aren’t interested in what you are talking about then you have to ask yourself why not.. Are they the right people? Is it an interesting idea? If you are starting literally from the ground up then start by networking within these local areas:
- Professional Seminars, Business lunches, Prior work relationships, Community business leaders, Non-profit leaders, Meetup Groups, Social Functions
In conclusion, when hunting for advisors remember to cultivate a spirit of generosity. As you grow your network, relationships, skills, and knowledge base – use these to help build up those around you. Nothing creates a more fruitful and prosperous network more quickly than giving back to the community. When everyone is helping each other – a fertile ground for synergy is created.
Structuring the Relationship: You found the perfect advisor, now what?
How do you align interests to incentivize advisors without risking the farm or later finding an advisor is unable to help in the way you expected? Structure matters, and it depends on several factors including your company stage, whether the company is an LLC or C-Corp/S-Corp and if you have compensatory plans already in place. There are two primary types of equity awards most commonly used:
- unit or stock options; and
- unit or stock awards/grants
For a startup with limited cash, stock or unit options are generally preferable to unit or stock grants unless the company is very early stage and the value of the company is too low to have any prohibitive tax consequence for the recipient. Why? Well, that gets into nitty gritty details unique to each company and, frankly, the goal of this is to provide the tool you need to engage advisors now. Then you can consult with counsel to determine the best structure for your situation.
Test the waters before granting equity incentives that could later have unintended consequences.
In no way should you leap before you look and this template, provided courtesy of the Founder Institute, is an excellent way for both parties to test the waters. Instead of spending the time and money upfront to draft definitive docs, think of this advisory template as more of a Memorandum of Understanding.
Nothing discussed herein represents legal advice or contemplates your specific company’s circumstances. Depending on your structure, this template may not be suitable for use in your business. The template is written to accommodate C-Corps and requires minor modifications for use in an LLC. Need local help tailoring it to your business?
A few words on completing the template.
A few sections in the template could benefit from some color commentary, so we’ve highlighted them below. If any explanations or terms still leave you befuddled, here’s a resource to familiarize yourself a bit more with the terminology.
Section 1: As discussed, one of the first items to define is advisor expectations. Schedule A in the template provides reasonable boilerplate language for you to outline a basic engagement. However, you should consider taking this a step further and consider more specific expectations. For example, if you produce a product and have engaged an advisor with manufacturing expertise, you might want to list your expectation for them to serve as a primary resource in that regard.
Section 2: This section may very well have a few terms with which you’re unfamiliar and that’s okay. Here’s what you need to know. A stock option agreement and restricted stock purchase agreement are simply contractual rights to purchase company stock at an established fair market value. The fair market value is what the company is worth at the time the company and the advisor enter into the agreement. This clause states that an Advisor will be granted equity, via either a stock option or restricted stock purchase agreement at a price per share equal to the deemed fair market value. You need not yet determine which form–stock option or restricted stock purchase–is appropriate or the fair market value of the company at the time you engage the advisor. Instead, you can work with counsel to make these determinations and draft corresponding documents during the timeframe allowed following the date of this agreement.
Q: How long should you date before tying the knot?
A: Three months (90 days)…
Or as long or short as you and an advisor feel appropriate, keeping in mind that you need to allow time to engage counsel to paper the deal. The template default is set at 90 days while Section 4 allows for termination within 5 days written notice. Do what makes sense for the situation and realize that once the 90 day period is up and a stock option or restricted stock purchase agreement is in place, things are “inked”.
Section 6-10: These sections are fairly straightforward for even the non-lawyers to understand. Combined, they help protect the Company from potential intellectual property (IP) leaks or conflicts of interest and ensure the Company receives appropriate IP assignments for developments that may (and hopefully) arise out of the relationship and are relevant to the business.
Advisor Compensation: This is a schedule to help guide you on what might be appropriate to offer an advisor in exchange for their services depending on both their level of engagement and the stage of your company. It’s there as a frame of reference and is in no way a de facto standard. The amount you agree to will be a product of negotiation and the perceived value both of the Company today and that the advisor brings to bear. It should also be noted that these recommended levels will vary based on the type of company you’re operating. This agreement generally intended for high growth companies; if you have a small business that you anticipate remaining small or unlikely to sell, the compensation levels are likely less than would be necessary to garner advisor interest (i.e. 1% of a small business producing $100,000 in net income is considerably less than a high growth company hoping to exit for $10,000,000).
Type of Security: This template contemplates granting either Common Stock or Restricted Common Stock. The differences in each pertain to tax treatment, performance or time-imposed limits to when the advisor will legally “own” the stock, and voting rights. The time-imposed restriction really exists in either case given the Vesting Period defined in the subsequent section. If you are unsure of which type, leave it as either and defer the determination until your counsel can assist.
Vesting Period: This section allows you to stipulate a period of time during which the Advisor will receive incremental shares, on a monthly basis, as opposed to upfront and all at once. For example, if you grant an advisor 1% and stipulate a 24 month vesting period, at month 15, the advisor will have accumulated 0.625% of the total amount granted (1% / 24 x 15 = 0.625%). At risk of slipping into the nitty gritty, the agreements your counsel will help draft after you engage an advisor with this agreement will contemplate certain triggers or rights that may cancel vesting. If vesting were cancelled at month 15, then 0.625% of the original 1% is all the advisor would own while the remainder would revert to the company. This protects the company in the event an advisor can no longer satisfy the terms of the equity option or grant agreement. Similarly, the definable “cliff” period in this section sets a minimum amount of time before any of the agreed stock vests to the benefit of the advisor. You’ll notice the template has “3 months” as the default value. This corresponds with the 90 day default period in Section 2. To avoid potential conflict, the cliff period you set should be at least as long or greater than the period set in Section 2.
Though not labeled as such, Accelerated Vesting is made available in this section as “___ % of unvested shares shall vest on closing of sale of the company”. To illustrate what this means, let’s assume you’re wildly successful and sell your company just 6 months after engaging an advisor that was on a 24 month vesting schedule. Without accelerated vesting, they would only receive 25% of the agreed 1% (6 / 24 = .25 * 1% = .25% ) equity upside. Had it sold at month 24 they would realize the full 1%. Your advisor may have been instrumental in helping you move the company along this quickly and this option allows you to set a minimum equity percentage an advisor will be entitled to in the event you sell the company before the shares vest in full (i.e. 75% of the 1% grant, regardless of the exit timing, though it’s not unreasonable for an advisor to request 100%). Logically, if the goal is to grow as quickly as possible and sell, allowing for accelerated vesting helps ensure incentives are better-aligned among all parties.
(NOTE: the “Bonus Share” language is not relevant to the discussed structure and may be omitted)
Advisor Agreement and Inking the deal: eSigning resources
Remember, don’t let yourself over think the advisor engagement agreement; there’s an inherent courting period that both parties set in good faith. If this is your first time engaging with advisors, focus on local expertise. Once both parties agree an engagement is of mutual benefit, ink the agreement and start creating value. Don’t get bogged down in what the final structure will be; this merely marks the starting blocks for you to engage counsel and draft documents. If the specific expertise you need is remote, that’s not a problem, assuming both parties are able to remain engaged and add value. Below are some resources to sign the agreement online.
- EchoSign by Adobe
○ $15-20/mp for 1-9 users
○ 10+ users = call for enterprise pricing
○ $10-30/mo for 1-10 users
■ At $10 documents limited to 5/month
○ Free 14 day trial
○ Free to use
○ Templates & resources all free
○ mobile app
○ Free to use templates or create
- Hello Sign
○ Free account
○ $13-40/mo for 1-5 users
- CoSign by ARX
○ 30 Day Trial
- Signing Hub
○ Free account
○ $16-91/mo for 1-5 users
- Right Signature
○ $14-49/mo for 1-10 users
○ General e-signature info from PC world
○ Using e-signature in microsoft documents
○ Lifehacker tips