Startup Advisors

Advisor versus Mentor

A startup’s potential for success is increased with knowledgeable and experienced advisors and mentors.  What is the difference between the two?  Generally speaking, advisors focus on the company while mentors focus on the founder.  An advisor is often an experienced professional who focuses overwhelmingly on helping your company.  He or she typically has expertise in a certain field that is germane to your business.  An advisor will help develop and market your product and help your startup develop professional relationships.  An advisor is also financially compensated, often through equity in the company (which means there is a fiduciary relationship between the startup and the advisor).

A mentor has a more “altruistic” role in the startup, because a mentor generally just cares about the success of your startup.  He or she is typically a close friend who is older and more experienced in life and business.  The advice sought from a mentor can be both personal and professional, because the relationship between the mentor and mentee has evolved over the years.  Mentors generally have no financial stake in the startup, so their only true motivation is to see the startup succeed.

Advisor Agreements

An advisor agreement defines the relationship between the startup and the advisor. Typical advisor agreements include what role the advisor will play in the startup (including expectations of both parties), how the advisor will be compensated, and how long the advisor agreement will last.  The biggest pitfall of hiring an advisor is having unrealistic expectations as to what the advisor will contribute to the startup.

Advisor Agreement Clauses

There are a variety of clauses a startup can include in an advisor agreement, which is why one should consult his or her startup attorney before entering into an advisor agreement.  Some of the common clauses are listed below.

Compensation

The most important clause in the advisor agreement is how to compensate your advisor.  While you want to compensate your advisor appropriately, not all advisors’ time is equal, and should not be compensated as such.  The typical equity range for an advisor of a startup is between 0.1% and 2%, depending on several factors, including the maturity of the business.  Some of the factors that would result in an advisor falling on the low or high range of equity includes what the advisor brings to the table, how much time they plan on spending working with the startup, the advisor’s industry contacts, and where the development stage of the business.

Confidentiality

Confidentiality is a key provision in advisor agreements.  Of course, an advisor will need access to much of the information related to the business, including confidential or proprietary information.  The last thing a startup wants is an unscrupulous advisor who discloses confidential information or worse, steals your idea outright.  If a potential advisor is unwilling to include a confidentiality clause, you probably want to consider finding another advisor and should discuss this issue with your attorney.

Term

Another important clause in advisor agreement is the term, or life, of the agreement and how it can be terminated.  Typically, the agreement can be terminated by either party immediately and will last approximately one year.  Be wary of an advisor who seeks a longer termination period, the last thing you want for your business is to be forced to continue working with an advisor that you want to terminate.

Invention assignment

An invention assignment clause is designed to protect the intellectual property of your startup.  The agreement typically requires the advisor to assign to the startup all work generated by the advisor on behalf of the startup.  While the obvious protections would include any work as to the design of the product itself, the assignment clause can also include items such as names of investors and/or clients, marketing or branding strategies, and customer lists.

Advisory Board

Instead of entering into an agreement with one advisor, some startups assemble an advisory board with several advisors.  An advisory board will statistically increase the chances of the startup’s success, including facilitating growth and boosting credibility.  They are usually comprised of three to six members, and each one is selected based on their individual experience and expertise, along with their network connections, to advise the startup and assist with any problems.  Advisors could be attorneys, branding specialists, investors, industry experts, or former entrepreneurs.   An advisory board is not the same as a board of directors, it is not bound by the same formal requirements (such as fiduciary duties to shareholders) and it carries no formal authority with the startup.