This article provides guidance on how startups can use advisors to support business growth—highlighting different advisory roles, tips on choosing and compensating advisors, and the importance of early selection for long-term success.
What Startups Need to Know about Advisors
Most startup founders are “big picture” types – creative, visionary, innovative thinkers with a unique and marketable skill-set. Yet, many do not have the ‘business chops’ to grow their ideas into revenue-generating operations. Whether they lack experience with certain business functions or simply the bandwidth to handle them all on their own, choosing to “go-it-alone” can carry a greater risk of failure. For most new ventures, especially those in the idea- and pre-seed stages, the key to success is having access to a deep bench of trusted advisors.
What is an advisor?
Founders often talk about their experiences receiving help from sponsors, mentors, advisors, and even their co-founders. Although the nomenclature may vary, advisory relationships essentially fall into 3 categories:
- A single advisor is someone who provides support, either informally (without an agreement) or formally, where the relationship is papered and compensation is given.
- An advisory board is a more structured and consistent means of receiving help from advisors; these relationships are typically papered and compensated with either cash or equity.
- A governing board is a group of advisors acting in an official capacity with authority to act on behalf of the business. These relationships are usually appointed, papered and compensated in equity and are required to follow the provisions of a corporations or limited liability company act issued by the state of incorporation.
Choosing advisors
It is never too early to seek out individuals who can provide expertise in support of a new venture. Depending upon your specific needs – business development, fundraising, sales/operational skills, industry knowledge - the right person can add value from day one. The key is choosing advisors thoughtfully to ensure that you are getting value for your business. If approached hastily, you may end up with an unwieldly situation and not enough time to extract the knowledge and skill sets you need most from them.
Several industry frameworks offer guidance to founders who are working to determine the appropriate scope of an advisory relationship for their venture. A common rule of thumb is 3-5 hours of advisory service per month in exchange for a percentage of equity (anywhere from 0.1% - 0.5% ) that vests over an agreed upon length of service (2 years, monthly vesting is standard).
Granting equity to advisors
It is a well-known fact that equity incentivizes performance and creates long term incentives to support your business. Therefore, giving your advisors some ‘skin in the game’ can be an effective motivator. That said, equity grants should not be unrestricted, but rather, tied to specific milestones pursuant to the terms of an advisor agreement. It is in your best interest, as founder, to define such milestones as clearly as possible. For example, there is a significant difference between making introductions and signing up new customers. An experienced startup attorney who understands the needs of early-stage ventures can help paper this relationship at a reasonable cost.
Also, before you can grant equity to your advisors, you will need to have basic formation documents in place. For example, your Article of Incorporation (corporation) or Certificate of Formation (LLC) will need to be created and filed. You will also need to decide if you want to grant your advisor’s options or outright stock. In the case of the former, adopting an option plan may take more time and involve additional costs to set it up, including possibly a formal valuation for purposes of setting an exercise price (see below). The benefit to your advisor is that they do not have to pay you any cash up front, and they will not be subject to tax.
If stock is granted outright, the advisor typically pays for it to avoid being subject to income taxes on the value of the stock. Unlike options, issuing stock is easier for a founder, as it is usually just one piece of paper and does not require a formal plan. Finally, with respect to having formal, third-party valuations done, it is important to note that they are not a prerequisite to issuing options or stock to advisors so long as you follow the safe harbor guidelines under Section 409A. For more information on pricing common stock under Section 409A, please see our blog post by OGC Partner Kristin Kreuder.
Setting up the future
Perhaps the greatest benefit to choosing advisors early and building those relationships is that they eventually become candidates for your governing Board of Directors. As your company grows and processes evolve, you will be tasked with increasing the size of your Board and filling it with the appropriate people. Having existing advisor relationships will significantly decrease the risk of filling your Board with unknown people who may, or may not, believe in your ability to run the company. It is all about relationship building and finding the right people well in advance; otherwise you may find yourself in a position where the Board’s interests do not necessarily align to yours.
There are always a million priorities when running a business, but finding and bringing on advisors should be at the top of your list. Not only do advisors help with getting started and making key early connections that can bring you success, they also impact your long term strategy by becoming trusted Board members.
Title?
Could there be a more striking contrast than the operating environments that exist within Big Law and corporate legal departments? According to AmLaw 100 data, profits per partner were up an average of 9.3% in 2023. Meanwhile, corporate legal departments are struggling with a significant lack of resources across the board—from budget to technology, expertise and team structure—hindering their ability to perform their required tasks. The disparity is stark, to say the least, and the imbalance reflects a troubling trend where Big Law appears to prioritize maximizing profits over supporting clients who may be facing economic pressures.
As a businessperson, I’ve been asked to do more with less (a herculean task for sure); and at times like that, the sting of increased costs from my service providers was particularly hard to swallow. It seemed like there was a lack of partnership on their part, no understanding of the pressures I was facing, and worse, an effort to undermine my cost-saving measures. Clients deserve a better experience with their service providers; and at OGC, we are laser focused on delivering exceptional legal service.
As a fully virtual, partner-only law firm, our model is intentionally designed to optimize efficiencies for the benefit of our clients. We provide experienced and sophisticated attorneys at a predictable hourly rate not seen elsewhere in the legal services market. And because our OGCs are former in-house counsel, they understand what our clients need most - pragmatic, business-forward advice delivered in real-time and a true understanding of what it means to “do more with less.” Our approach leads to greater efficiency, predictability in costs and accurate scope of work estimates, and a strong emphasis on delivering tangible results, all of which resonates with clients looking for transparency and cost-effectiveness.
Early on in my legal career, I had a conversation with a crusty old criminal defense lawyer about setting fees in criminal cases. He shared that it’s a two-step process—first, you figure out how much money your client has and then you take it. The same might be said about Big Law—while much of corporate America has been feeling the squeeze of a tight economic environment, it appears Big Law continues to increase its slice of the pie, squeezing every last nickel out of its client base. As our clients know, we offer a better alternative – a partnership that prioritizes their business goals and needs. And because we’ve served in-house, we understand why they want and deserve predictability, transparency and efficiency. OGC is a compelling alternative to the traditional model of legal service delivery.