Startups often make use of advisors for help on strategy, product, lead generation, or credibility with potential investors. Unfortunately, many startups report that their advisors weren’t as helpful as expected, and they’ve given away too much equity to someone undeserving. Here’s how to make the most use of advisors, while avoiding some of the pitfalls.
Get Advisors to Invest
What: Rather than have the advisor be paid by your startup in equity, ask them to invest, even if it’s just a token amount, for example $5k in a $250k round. Most advisors also claim to be Angel investors, so if they say no, ask yourself if they really believe in your company as much as they claim.
Why: If an ‘industry leader’ is willing to spend their valuable time on your startup, they should also believe in the company, and investing is a great way to show that. This approach tests that belief and can potentially increase your runway.
What: Make half of the equity award based on specific milestones, rather than time based alone. For example, you might ask for milestones like: Generate 5 Fortune 500 leads that reach 2nd meeting, or introduce 3 CTO candidates that pass the coding challenge, or help close the Bayer contract by August 30.
Why: This approach helps to avoid giving equity to an advisor that isn’t helpful. With both sides agreeing to the specific, expected results in advance, there’s less potential for friction with the advisor if the milestones aren’t reached.
What: Have the advisory agreement automatically expire every 6 months (or any cadence you prefer) and require both parties to sign a renewal each time.
Why: If an advisor relationship isn’t going well, you can avoid the potential conflict of letting them go, by simply letting the agreement expire. This allows you to offer this equity allocation to another advisor who might work out better.
Note: You may use this document at your own risk; its free provision here does not constitute legal advice.
It’s ready to send, you’ll just need to complete the areas highlighted in yellow. These highlighted areas include each party’s name, equity allocation, renewal timeline, expected milestones, and time awards. The current document uses the recommended defaults of a 2 year agreement, with 6 month renewals, split 50/50 between time and milestone results.
If you’re going to make use of advisors at your startup, it pays to ensure they can provide the help they promise — and more importantly the help you need. Using the basic principles above and this advisory agreement; you can quickly codify your arrangement, without legal fees. The document’s features, such as milestones and renewal requirements, will help protect your company from overpaying (in equity) for an advisor that does not deliver on their promises.