engaging advisors for startups - presentation from Orrick


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A great presentation on how to select advisors and how to compensate them.

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engaging advisors for startups - presentation from Orrick

  1. 1. Engaging Advisors for Startups(the FAST form):November 10, 2011Larry Kane 1
  2. 2. Why the Founder Advisor Standard Template (FAST) Form:• FAST allows startups to quickly engage an advisor• Presents fair terms to startups and standardized equity compensation based on stage of the Company and level of engagement by Advisor• Reduce Legal Costs and lengthy negotiations• Establish Reasonable Expectations of Founders and Advisors on Role 2
  3. 3. Why Engage an Advisor?• Great Advisors can significantly accelerate the business• Expertise • Domain Expertise (General Business advice) • General Business Expertise • Leverage Relationships • Business contacts • Other Advisors, Consultants, Partners and Employees • Funders (Introduction and use of name on business plan) • Risks • Advisor does nothing and gets equity • Advisor has bad reputation (the Toxic Advisor) 3
  4. 4. General Recommendations on Engaging an Advisor• Entrepreneurs should engage with advisors carefully.• Advisor Attributes: • overall reputation • domain expertise • working relationship• The Founder Institute recommends that an entrepreneur work with a potential advisor for at least one month and spend at least [8] hours together before formal engagement • 8 hours may not be realistic 4
  5. 5. General Recommendations When Engaging an Advisor:• Research Potential Advisor • Linkedin • Google • Referrals • Other Internet Sources• Request: If the chemistry is good with the advisor, the entrepreneur can make a small request of the advisor to test out the working relationship.• Engage: We recommend a full frank discussion with the Advisor on expectations. 5
  6. 6. General Issues and Risks• Fundraising: • Advisor cant act as a broker – • Equity compensation should not be tied to fundraising or closing of an investment by the advisor’s contacts • Advisor Fails to Do Anything • We recommend a three month cliff on vesting and • Company has right to terminate agreement at any time 6
  7. 7. THE FAST FORM GENERALLY• Why should I use the FAST agreement? • The FAST agreement is designed to save time and money negotiating advisor relationships.• Can I modify the FAST agreement? • Yes as you need – But talk to your lawyer if you change the IP sections • Form is a Guide or Tool • Every Advisor and company is different • Founders need to be flexible 7
  8. 8. Compensation of Advisors• Why compensate advisors with equity only? • The advisors that the FAST agreement targets are founders and advisors providing strategic advice through advisory board roles, and these advisors are normally compensated with equity. • The FAST agreement is not designed for traditional project consulting and "work for hire" relationships.• How much overall equity should I allocate to advisors? • We recommend standard equity grants for an individual advisor based on type of advisor and level of service. • On Formation, the Company should have an equity incentive plan of which we generally expect between 3% to 5% (in the aggregate) of the Company’s Common Stock to be issued to strategic advisors or an advisory board. 8
  9. 9. Compensation: Form – NSO versus Restricted Stock• Restricted Stock • Must be Approved by Board and Granted at FMV -409A issues • Best for Tax – secures holding period for long-term capital gain • Best for Securities Law – secures 144 holding period • Requires 83b to filed • Advisors becomes shareholder and obtains all rights as a shareholder • CA – must file 25102(o) for plan or 25102(f) if granted outside plan• NSO • Must be Granted at FMV at time of Grant • Taxable Income Based on Exercise Price and then current FMV of stock • No Securities Holding period until exercise • No Shareholder Rights 9
  10. 10. Compensation of Advisors (the Fast Form)• FAST Form is a check the box• There are three levels of company maturity that influence the equity compensation: idea, startup, or growth.• There are also three levels of engagement for an advisor that also influence the compensation: standard, strategic, or expert.• Service Level Stage Idea Startup Growth Standard .25% .20% .15% Strategic .50% .40% .30% Expert 1.00% .80% .60%• Percentages are based on the outstanding on the number of outstanding shares of Common Stock calculated on a fully-diluted basis of all outstanding and convertible or issuable securities as of the date the Board of Directors approves the foregoing equity compensation.• 10
  11. 11. Advisor Services Levels: Standard Performance• Commitment: • Attend quarterly meetings to provide feedback on Company’s strategy for at least one hour. • Attend quarterly meetings of the Company’s Advisory board. • Provide reasonable response to email requests by Company.• Additional Services: Promotion of the Company • Advisor should also actively promote and make introductions on behalf of the Company through Advisor’s overall network of business contacts, including forwarding the Company’s business plan and other materials as requested by the Company. • Compensation: Idea Stage is 0.25%; Startup Stage is 0.20%; Growth Stage is 0.15% 11
  12. 12. Advisor Services Levels: Strategic Performance Levels• Commitment: • Standard Performance plus: • Attend monthly meetings to provide feedback on Company’s strategy for at least one hour. • Attend one additional monthly meeting up to one hour with a potential customer, investor, strategic partner, vendor or employee.• Additional Services: Promotion and Recruiting • In addition to the promotion services, Advisor to assist the Company in finding additional, potential founding team members and employees through the Advisor’s overall network of business contacts. • Compensation: Idea Stage is 0.50%; Startup Stage is 0.40%; Growth Stage is 0.30% 12
  13. 13. Advisor Services Levels: Expert Performance Levels• Commitment: • Standard and Strategic Performance plus: • Twice Monthly Meeting to Provide Feedback on Company Strategy for at least two hours each• Additional Services: Promotion, Recruiting, Contacts and Projects In addition to the promotion and recruiting services, Advisor agrees to: • Contacts: Advisor agrees to make introductions to and assist in the acquisition of marquee customers, strategic partners and key industry contacts and attend meetings with such potential customers, partners and key contacts. • Projects: Advisor agrees to assist the Company on at least one strategic project as requested by the Company during the term of this Agreement . • Compensation: Idea Stage is 1.00%; Startup Stage is 0.80%; Growth Stage is 0.60% 13
  14. 14. Company Stage: Idea Stage• Team: The team consists of only part-time founder(s).• Customers: The company is in discussions with potential customers to determine demand in the market. The pricing/revenue structure has been developed, but needs market validation.• Revenue: The company has no revenue.• Investors: At least one group consisting of the founder(s), their friends or family has invested.• Product: The specifications for a minimum viable product including wireframes and system designs are complete. 14
  15. 15. Company Stage: Startup• Team: The team consists of full-time founder(s) and is in the process of hiring initial employees as needed.• Customers: The company has received letters of intent or customer commitments and the market need has been validated.• Revenue: The company may be collecting revenue.• Investors: Investment may have been raised via friends/family or professional investors (angel, venture capital, etc.).• Product: The launch of the minimum viable product is imminent. 15
  16. 16. Company Stage: GrowthTeam: The team consists of full time founder(s) and is in the process of hiring employees as needed.Customers: The company has achieved significant traction and user-based growth.Revenue: The company is collecting revenue.Investors: Prior investment may have been raised and the founders are prepared to pitch to professional investors if additional capital is needed.Product: The product has been launched and is periodically refined based on customer feedback. 16
  17. 17. Key Legal Terms/ Issues• Expenses – need to be pre-approved• Termination: At will with five days notice• NDA on Confidential Information• Assignment of Intellectual Property• Use of Name of Advisor• Definitive Stock Purchase Agreement or Option Agreement Supercedes FAST Form 17
  18. 18. Resources on the Webwww.orrick.com/startuptoolkit www.venturehacks.com www.askthevc.com www.vcconfidential.com redeye.firstround.com 18
  19. 19. Larry Kane 415-773-5827lkane@orrick.com 19