Deal Between Advisors and Startups

**All content is an opinion of the contributors and not to be taken as the ultimate source of truth, but a viewpoint for your careful consideration**

As a Startup it is really important to be clear on what you want from an advisor. There are various moral implications, share options, etc. that one must consider when either being an advisor or on boarding an advisor when your a startup.

As a startup you should understand that equity is the most expensive form of financing for a company. However some startups we see use their shares very tactically and give 10–15% sometimes more to advisors who promise sun, moon and stars. While this possibly leads to initial traction it almost always causes more harm in the long run, especially in the later rounds when serious vc’s are looking to scale the company. The VC’s now have to clear the cap table and it’s almost always never easy or cheap to do so, leaving the startup in a very uncertain situation.

At Hatch we are big believers in investing in the process. The right process should deliver the right outcomes. While there are definitely outliers, this is an illusion you must be aware of. The more successful startups understand and invest in process.

Check out this video to see some of the thought processes that must go through when considering an advisor

Some summary of the knowledge shared in this video:

Founders Institute has a good model for advisors and it is well structured. There are three different levels of advisors, please find below copied from fast.

Standard Performance Level

Strategic Performance Level

Expert Performance Level

For a clearer definition of what stage a startup is:

The Company Stage is determined using the guidelines below.

• For early stage startups who are still in a concept stage there is a nuance as a advisor can become an co-founder especially if they are helping you conceptualize the idea/product etc.
• The earlier stage the company is the more ethically the lines are not clear and FAST might not be applicable.
• If the advisor doesn’t put in money it’s very clear that you should stick to FAST. However there are a few cases where it is not so clear and hence blurs the lines on ethics.

1. If the advisor is investing actual money into your startup
2. If the advisor is clearly articulating that he/she will actively help you close a client contract(different from opening a door).
3. If the advisor is going to help you raise your investment.
4. If the advisor helps you build the product
5. If the advisor really helps you build the strategy. i.e researches the market, etc.
6. The Role of the advisor changes from just being a advisor and then to a employer and/or team member where they add value such as finance, IT, etc. And they don’t take compensation for it.
7. Some combination of above.
8. If its all of the above congrats you found a co-founder.

• What is clear from above is Stick to the FAST agreement unless the Advisor wants to get more involved and if he/she says they want to do so, be very clear on what the deliverables are.
• Have a time period before you vest stocks with the advisors. Some suggested a 3 month cliff.
• Vesting is breaking down shares issues into time periods. So instead of giving 2% upfront you might want to give that over a period of time based on performance.
• If going outside of the framework presented above for whatever reason, it is good to articulate what exactly the deliverable is. The example of the video articulates say you have a financial advisor who needs to be compensated for his expertise and delivers you a funding round. Now usually an investment bank might take 3–5% of the capital raised, so it is fair for said advisor who closes a round for you to ask for similar compensation. If you have no capital it might be good idea to incentivize him with equity rather than paying him cash depending on where your startup is. I say this with a caveat as again you have to understand that your shares are the most expensive form of financing.
• If an advisor has equity and does not give advisory there is not much a startup can do as the equity has already been awarded
• If someone invests time, money, opening doors, closing sales he/she has crossed over to co-founder which is great for your startup.

We hope above brings a bit more clarity but if you have further questions please feel free to reach out to support@hatch.lk