The Advisor Onboarding Checklist (Short Startup Guides)
Everyone loves a good advisor, and everyone loves a good checklist... so we combined the two!
Hey Founders et al. Sometimes I let a lot of time go by between posts. I try to be consistent and post once every 2 weeks, but recently I got married and that was kinda a time-suck! Anyways, we’ve gotten a bunch of new subscribers since I last posted, and I feel obligated to give them a fresh dose of Legal Toolbox knowledge. So here we go…
As our subscribers know, we’ve been creating a long list of legal “startup guides” to help founders navigate the stickier legal speed bumps that plague early stagers. Today, we are publishing our 5th!! of this series: “The Short Startup Advisor Onboarding Checklist.” We’ve packed these guides with resources and organized them into actionable steps you can take (or earmark for later).
Previous Episodes
Coming Soon
The Short Startup Insurance Guide
The Short Startup Advisor Onboarding Checklist
The Short Startup Terms of Service Setup Guide
The Short Startup Trademark Guide
The Short Startup Data Privacy Guide
The Short Startup Data Security Guide
The Short Startup Employment Law Guide
… and more
This one is near and dear to our hearts because we are so involved with advisor relationships at HeyCounsel. Hope you enjoy!
💡 Intro Note:
Advisors come in all forms and functions. An advisor can be a friend you call on to be a sounding board, a family member who lifts your spirit when you are down, or a co-worker or friend from a past job or career. Advisors can also be strangers who are industry experts or thought leaders who, in your dream scenario, would be employees of your company. With that being said, not all advisors become equity advisors. This checklist is specifically designed to help you determine what to do when you decide you’d like to bring on equity advisors to level-up your company.
The high level steps to onboarding an (equity) advisor
Create an advisor strategy
Determine how many advisors you’d like to have, and how you plan on leveraging those advisors. There are two schools of thought regarding advisor equity pools that are worth considering (and possibly combining).
Traditional advisor program: Plan to get 2–4 competent advisors that can shore up on areas that compliment you well. Think about the things your founding team either doesn’t do well or have a history of doing well. This is the classic “hire people smarter than you,” which is typically easier said than done, and you could expect to get a few of these advisor hires wrong (and would then need to sever the relationship and start over).
Micro-advisor program: Instead of granting large chunks to a small group of advisors, companies can split equity amongst a larger pool of “micro-advisors” to foster a more inclusive and more diverse advisory pool. Advocates of this method believe that the old way of structuring an advisor program — i.e. reserving advisor equity for a few strategic advisors — could leave companies overly dependent on the fruits of only a few advisor relationships. A micro-advisor program reduces the risk of having large chunks of dead weight on your cap table and increases your chances of having that home-run contributor that pulls 100x their weight.
Combination: Taking a few traditional larger advisor engagements and filling in the rest of the advisor pool with micro-advisors.
Identify and evaluate your new advisor.
Leverage your network. Finding advisors is not too different from finding investors. You may already know a few people who you’d like to be part of your advisory team. If not, identify a profile of the target advisors for your business and then search within your networks for these people. Ask friends and associates for introductions, and monitor your online social networks for thought leaders who are operating in your space (or tangential ones).
<aside> 💡 For legal advisor engagements, HeyCounsel will care of this part for you
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Initial Due Diligence.
Conflicts. Once you connect with an advisor, they will of course want to hear what you are working on and they usually have valuable insights, feedback, and suggestions right away on the first call. Before you fully share your project though, make sure to ask if they are currently an advisor or investor in a company that is a direct competitor, which may or may not preclude them from giving you advice as well. Some experts are used to being advisors and may want to jump right into discussing a potential formal relationship, while others may want to speak with you a few times first and get to know you a bit.
Sample questions:
What other companies do you advise today?
Do you currently work with companies that are competitive or could conflict with my business?
Other initial DD Questions: As you consider making someone a formal advisor, you will want to ensure that you get some questions answered before you do.
How much time do you have for this company on a weekly, monthly, quarterly basis?
What would the companies you advise say about you? Can I speak with one of them?
What do you hope to gain out of the time and energy you spend advising us?
Align on expectations and compensation.
This should be a natural follow-up to the conversation above. Your conversations with the Advisor should naturally progress towards what open questions you have about the industry or business, the big risks you face, and how the Advisor can support you in those areas.
You will want to be specific about…
Services to be provided. What will the Advisor do to help your startup thrive? Draft and review contracts? Advise on regulatory matters? Help you with a big fundraising? All of the above?
Mode of operation. How will they do it? Will they be on your Slack network? Will you have weekly meetings? What technology will you be using to collaborate?
Time and energy commitment. How often will you need them, and for how long? Some advisors pop in for 30 minutes every 2 weeks for a quick zoom call to answer questions. Others are extremely hands-on… doing actual work several hours per week on behalf of the company.
Leave room for flexibility. While it is best to be as clear as possible about deliverables, it is also important to leave room for flexibility and uncertainty. Advisor engagements often ebb and flow, with you using them more for certain periods of time than others. Most advisor agreements often include language that leaves room for this by specifying that the engagement may include “other general advisory work” from time to time as needed by the CEO.
Align on compensation. Time is money… and sometimes that money takes the form of equity. There are tons of factors that will determine how much of your company equity should be granted in exchange for the advisor’s services. These factors include but are not limited to (a) the advisor’s level of experience, (b) the advisor’s time and energy commitment to your company, (c) the stage of your company, (d) the advisor’s level of interest, belief and intrigue of you company, and (e) either sides willingness to negotiate these terms! Once you land on a number, it’s time to finalize the advisor agreement.
Finalize the Advisor Agreement
Start with a credible template. Check out the FAST (Founder / Advisor Standard Template) from the Founder Institute.
Make it yours. Make sure you understand and customize the material aspects of your advisor agreement. Check out this HeyCounsel post for more information.
Get signatures. Use Docusign, Hellosign, or any other E-Sign provider. Just make sure you get it signed by both parties.
Get board consent for equity grants
If issuing common stock - make sure the advisor is aware of the value of the stock and the tax implications of accepting the equity grant.
If instead you are issuing stock options, you must have 409a Valuation in place before you grant the options. To learn more about the 409a process and what it’s all about, check out this HeyCounsel post.
Execute the equity grant documents.
Simply stated, if you are using a software that does this for you (e.g. Clerky, Angellist Stack) you should be fine if everything is fairly standard. However, don’t do this alone. If you aren’t using a software specifically for this type of grant, find yourself an attorney to make sure you do it correctly!
Remind your advisor to file their 83(b) form with the IRS.
Advisory shares almost always vest over time (in other words, they are restricted stock). Recipients of restricted stock at very early stage startups will usually elect to pay tax upon receipt, not when the stock vests. As such, they will need to file an 83(b). It is their responsibility to do so, but you should be proactive and remind them anyways :)
Note: This does not apply to stock option grants, unless the grant comes with the right to “early exercise”. If it does, they will want to file an 83(b) election as well.
Update you cap table
If you are using cap table management software to issue these grants, this should either be automatic or very simple. If not, make sure your updated cap table reflects the grant moving forward. Chat with a lawyer if it’s confusing! It probably will be…
💡 Lawyer review. As always, this stuff is fairly nuanced and, while this checklist is provided to educate founders and set expectations, it should not be substituted for legal advice. Have an independent lawyer help you with the execution of the legal heavy steps, or at least have them check your work!