By Fernando Berrocal

Since startups are all about taking risks, a startup investment is centered on finding the startup that is successfully minimizing its risk over time. Building a diverse, well-rounded support network that can function as a big asset to your venture—aside from investors, this will primarily be your board of directors and your startup's advisors—is one of the most popular (and investor-friendly) methods to de-risk your startup.

If you identify people with expertise who can help your startup succeed, you might want to explore formalizing their connections with you. This does not, however, imply that they should sit on your board of directors. The board of directors is a structure that is rigorously controlled by state corporate law and the startup's rules, and serving on the board is a big commitment with a lot of obligations. It is not a suitable position for anyone who can help your startup.

A startup adviser may complement your founding team's talents and expertise without requiring the same level of commitment as a board member.

What is the role of an advisor?

An advisor is essentially someone who can help your startup become less risky to investors by endorsing it and providing guidance. It is up to you, the entrepreneur, to decide who you will seek advice from. For one startup, a well-connected industry insider or a business mentor could be ideal, while for another, a well-connected industry insider or a business mentor might be optimal.

Picking advisors is comparable to electing co-founders in that you should think about how their skills will complement and balance your team's strengths and limitations. Strategic advice, extensive industry knowledge, deal-making abilities, investor contacts, and/or name recognition are all things that an effective advisor may provide. During the investor pitch, well-respected advisors may be a valuable addition to a team. Although it is up to your founding team to have a solid idea and present a convincing pitch, having the assistance of well-known advisors may transmit a positive message to investors.

Another factor to consider when selecting startup advisors is how you will collaborate with them. The importance of team chemistry can never be underestimated. Connecting with someone and immediately onboarding them into an advising role is bad practice. It takes some time to see how advisors will fit in with your team and your personality.

What are the legal obligations of an advisor, and what are yours?

An advisor is a sort of independent contractor that works for an organization and, in particular, the CEO. There's also no need for the number of advisors you need. The terms of an advisory agreement, a one-of-a-kind contractor agreement that defines the individual as an advisor, determines the remuneration and specifies the conditions of the connection, define the advisor relationship. You won't have to worry about issuing extra non-disclosure or non-compete agreements to startup advisors because of the nature of most advising agreements. In most cases, the agreement will include provisions for Intellectual Property (IP) protection.

Unlike a position on the board of directors, which has legal obligations to the startup's stakeholders, an advisor solely has obligations to the company and its CEO.

The agreement requires advisors to make themselves accessible for meetings and inquiries regularly, but it does not require discussions to take place in person. Advisors often assist the startup through one-on-one connections with the CEO, who may contact them as regularly as weekly or as infrequently as once a year. Monthly or bi-monthly email updates and regular conference calls are also usual when dealing with many advisors.

Finally, you receive out-of-advisor relationships that you put into them. It's your responsibility to keep advisors informed about corporate changes and engaged. Startup advisors won't be able to maximize their worth to your startup if they don't have up-to-date information. Giving your advisors an equity stake in your startup isn't worth it if you're unwilling or unable to take reasonable steps to connect with them.

Compensation:

Advisors are frequently compensated with a small equity share in the startup. Because of their short time commitment to the startup, you should generally keep these equity divisions conservative—around 0.1% to 0.25% of the capitalization at the time of grant, with up to 1% in exceptional circumstances. Since advisor contributions are most important during the startup's early stages, most agreements include a 2-year vesting plan with 0–3 month cliffs.

Give away ownership of your startup with caution, just as you would with any stock grant. Investors will be interested in your advisor ties, and if advisors have unnecessarily big equity stakes, they may be put away. Investors want to see a commitment from your advisors, and vested ownership helps, but a questionable advising arrangement might raise suspicion during due diligence.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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