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[zz]Advisors; When to appoint them to the Board of Advisors and how much, if any, equity to grant them.


Advisors; When to appoint them to the Board of Advisors and how
much, if any, equity to grant them.

Prithvi Tanwar

A start-up wants to formalize a relationship
between the company and certain advisors who have been providing
invaluable advice for the last couple of months. The start-up is also
considering granting these advisors some equity in the start-up and want
to know what market is. The answer, infuriating for some, is the
classic lawyer answer of “it depends”.

Advice is not hard to come
by, especially in the very early conception phases. Sorting the good
advice from the bad is a much harder matter. Bringing on someone to a
board of advisors signals a long-term relationship between the start-up
and this person. For an effective relationship to exist, the flow of
information between the start-up and the advisor must be a two-way
street. The company must share information (sometimes sensitive) to get
concrete, relevant advice – a certain level of trust must exist. A grant
of equity to an advisor serves the additional functions of letting your
advisors have some skin in the game (not much) and allows the company
to formalize certain conditions between the company and the advisor that
would normally not exist in a free advice scenario. This, in turn helps
reinforce trust.

How much equity a company should grant depends
on several factors, some of which include: what the particular advisor
brings to the table in terms of contacts and experience; the level and
volume of advice that they are going to be dispensing to the board of
directors and the officers of the company; how long they will be
actively involved with the company and ; whether the advice that they
are providing is something that is conceptually important in the long
run or is more relevant to a certain phase of the company. Generally
speaking, a company should add somebody to their board of advisors only
when the person will have a long-term relationship with the company and
when their advice and contacts will actually help the company move from
one stage to the next.

Most advisors do not work for equity,
rather, they do it because they are drawn either to one or more likely a
mix of the following: the problem that the company is addressing, the
founders, or the technology the company is producing. At the same time
granting them equity is a nice gesture on the part of the founder to
show them that they are part of the company. Granting advisors equity
also allows founders to draw-up non-disclosures, confidentiality, and
other ancillary documents for advisors to execute to formalize the
relationship between them and the company. In the terms of ranges, take
everything I say with a grain (or pound!) of salt. We’ve seen ranges
anywhere from 0.25% of the outstanding equity to 0.5% and sometimes even
1% or higher in exceptional circumstances.

One thing to note
about the board of advisors is that unlike the board of directors, the
advisors are not really bound to the company by fiduciary duties. These
duties include the duty of care, the duty of loyalty, the duty of
confidentiality, the duty of disclosure and other duties that are
inherent in a director’s role and bind them in their day-to-day
activities. To counter this deficiency, any advisor you bring on into a
formal advisory role with the company should execute, at the very least,
a confidentiality and non-disclosure agreement. In some cases I have
seen situations where advisors are asked to sign a non-compete agreement
(rather extreme!) that restricts them from giving advice to similar
companies during the relationship or for a certain term after their
relationship with the company ends. I have also seen
assignment-of-invention clauses which require the advisor to assign any
technology that he or she develop during his or her relationship with
the company. Of course, this is limited to the particular sphere of
business of the company.

In sum, advisors can greatly help the
founder or the founding team get some direction on where they want to
take their business, building their core product and gaining some
traction in the marketplace in terms of contacts and strategies to reach
out to customers. Bringing on the right advisors can be critical to the
success of the company. To be effective, advisors must be privy to
confidential information and to certain facets of the start-up. A
company should make sure its advisors are bound to the company by
certain agreements. Once a company thinks it has that special advisor
and wants to take that next step – it should call a start-up lawyer and
run through the necessary risk analysis first. This is a smart move.

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