Startup advisors, who are they and what do they do? Well, as the name implies, startup advisors are individuals who provide guidance, expertise, and support to those who are starting up a business. They play a very significant role in helping startups succeed as they provide valuable input and advice on business planning and execution, financial analysis and management, customer acquisition, product development, marketing strategies and more. But how can startups compensate startup advisors in order to retain and motivate them to continue providing their valuable insights, advice and guidance? This article discusses the concept of startup advisors, the importance and types of startup advisors, and the methods of compensation that can be used to attract talented startup advisors.
Startups and advisors
In general terms, startups are early-stage companies looking to develop their business ideas and create new products or services. To compete effectively in this competitive business environment, startups need the right guidance and knowledge on the various aspects of their business plans. So, how can a startup go about obtaining this valuable input? This is where startup advisors, who are seasoned business professionals with years of experience in different aspects of business, come in. They provide advice regarding the best way to develop the business, how to manage financials, and market strategies, provide connections, etc.
Who are startup advisors?
Startup advisors come from different backgrounds - they may be highly experienced entrepreneurs, business professionals, former or current employees of established companies, consultants or investors. These professionals offer their valuable insight and expertise to startups in an effort to help them achieve their business goals. They serve as a sounding board for new ideas and provide counsel on how to implement these ideas efficiently and effectively. Since startups are in the initial stage, they require a lot of support, advice and guidance to build their business. As a result, startup advisors play a very important role in the development and growth of startups.
What do startup advisors do?
The role of startup advisors is critical in helping startups manage and grow their businesses in an effective and efficient manner. Startup advisors help startups design their business models, develop financial plans and business forecasts, market the company's products, provide connections and insights into different markets and industry segments, counsel on how to acquire customers, provide information on different cooperation opportunities, conduct strategic planning sessions with business managers, provide advice on how to operate the business efficiently, and so on.
Thus, startup advisors are not only experienced professionals with a vast wealth of knowledge and experience, but they also bring a network of business and industry contacts that help startups succeed.
Types of startup advisors
There are different types of startup advisors according to their areas of expertise and experience. Following are some of the most common types of startup advisors.
1. Marketing advisors - They work to develop marketing strategies, assist in identifying the target markets, identify potential partners, and assess the marketing channels and strategies. They are experts in strategic marketing and market research, hence, their contribution is an important factor in the growth of a company.
2. Strategy advisors - They are strategic planning and business management experts. They assist startups in developing a roadmap for growth, identifying resources, understanding industry trends, its potential to scale, etc. Overall, strategy advisors serve as a valuable tool for the growth and expansion of business.
3. Financial advisors - They provide information on managing finances, preparing financial plans, assessing risk, preparing the budget for business expansion, assisting startups in finding the right funding opportunities, and preparing financial forecasts. Therefore, financial advisors are essential in determining the direction of long-term financial plans and ensuring that the business has sufficient funds to support its growth.
4. Tax advisors - They provide information on tax issues, prepare tax returns, coordinate with the IRS and the state tax authorities, and so on. In order to avoid tax implications, startups must work with tax advisors to ensure that they are compliant with all laws and regulations, and hence, avoid unnecessary penalties for any violations.
5. Legal advisors - They provide information on legal issues, advice on different contract forms, prepare agreements, and assist in coordinating with the legal authorities. Legal advisors help startups by ensuring that they have a solid legal foundation to build upon and enable the company to operate in a safe and secure manner.
What is the importance of startup advisors?
Startup advisors are an important resource for startups, as they provide critical insight and knowledge in different areas of business. Following are the top 3 reasons why startup advisors are the most critical aspect of a business:
Access to knowledge - By working with experienced startup advisors, startups have access to the knowledge of people with significant experience in different businesses and industry segments. As a result, startups can gain valuable insights and information regarding their sector and develop strategies to achieve their business goals.
Networking and connections - Startup advisors can provide opportunities for startups to develop their businesses by connecting the company with potential investors, corporate partners, industry leaders, etc. As such, startups can establish strategic alliances and partnerships that help them achieve their business goals.
Credibility - Along with the support and guidance offered by startup advisors, they provide startups with a sense of credibility, legitimacy, and professionalism that can attract and motivate customers, peers, and investors. Hence, startup advisors help startups to attain significant benefits and build a reputable brand image.
Compensation for startup advisors
Now that you know who are startup advisors and how important they are, it is time to find out how they are compensated. Since startup advisors are contributing their time, expertise, and knowledge to startups, they expect to receive compensation in return. Compensation for startup advisors can be either by simply paying cash or granting equity ownership of the startup. Based on various factors, the type and amount of compensation vary.
Why should you provide compensation to startup advisors?
Most startups are fairly new, so they might not have the resources to pay their startup advisors a salary. However, not providing compensation can lead to a loss of valuable advice, connections, expertise and knowledge. In order to motivate and incentivize startup advisors to work with your company, you must provide compensation. This also helps to align their interests with those of the startup, and thus, increases their interest and passion to work with your company. As such, you must develop a compensation plan that motivates your startup advisors to continue their support and guidance.
What are the types of startup advisors' compensation?
Mainly there are two ways in which startup advisors are compensated. The two types of compensation for startup advisors are cash compensation and stock-based compensation.
Cash compensation - Startup advisors can be compensated in cash for their services. They may receive a fixed amount of cash for a certain number of hours worked or on a monthly or yearly basis. Therefore, startups should make sure that the amount of cash compensation or the terms are clearly stated in the startup advisory contract.
Stock-based compensation - Many startups prefer stock-based compensation over cash compensation. They believe that being compensated in a company's securities enables them to make the most of the company and its growth potential. Stock-based compensation basically involves giving startup advisors equity ownership in the company. Below is a brief detail of stock-based compensation.
What is stock-based compensation and how do they work?
Well, equity or stock compensation is a form of compensation in which startup advisors receive equity ownership of the company and is also known as advisory shares. There are two types of stock-based compensation which are as follows:
1. Restricted stock awards (RSAs) - RSA is a compensation method in which startup advisors are given a certain number of shares, but there is a vesting schedule that determines when they can actually access or acquire the stock. Upon completing certain milestones within the company, such as reaching a certain revenue or profitability level, the RSA is then converted into shares of the company's stock and the startup advisor can fully exercise its rights.
2. Stock options - It is also a form of equity compensation in which startups grant startup advisors the right to acquire stock at a predetermined price (strike price) over a specified period of time (vesting period). The strike price is calculated based on the fair market value of the company's stock, while the vesting period is the amount of time that the stock has to be held before it can be exercised by startup advisors. The process of exercising is basically calling for the shares and purchasing them.
Which is the best method of compensation for startup advisors?
When it comes to determining the best form of compensation for startup advisors, there is no one-fit approach since it may vary on different factors, such as the startup's stage of development, startup advisors' preferences, the needs of the startup, and so on. However, as per reports and research, most startups prefer the stock-based compensation method due to the fact that under equity compensation, the sense of ownership, the vested interest, and their overall commitment to the startup is much greater than that of cash-based compensation.
Moreover, equity compensation enables startup advisors to be better aligned with the startup and as such, they can potentially contribute more. From this perspective, equity compensation might be more effective in terms of increasing startup advisors' performance and commitment levels.
Things to consider before providing equity compensation to startup advisors
While cash compensation is a simple matter, providing equity compensation might be a bit more challenging. As such, there is a need to understand the factors that you must consider before providing equity compensation to startup advisors. Here are some things that you must take into account when determining, designing, negotiating or discussing stock-based compensation for startup advisors:
1. Dilution - The dilution effect is basically the negative impact that granting shares to someone can have on existing shareholders. Proper analyses and calculations must be carried out in order to determine the amount of dilution that will be caused to existing shareholders if startup advisors are given equity.
2. Taxation - Startup advisors must be informed about the tax implications of receiving equity compensation from a startup so that they can plan and prepare for this. There may be two taxable events: at the time of purchasing the shares and when selling the shares.
3. 409A valuation - Startups are required to conduct the 409A valuation, which basically provides an assessment to determine the fair market value of the company's stock in accordance with Internal Revenue Service (IRS) regulations. This can be used as a benchmark for determining the price of equity compensation.
4. Agreement - Startup advisors and startups must come to an agreement regarding the equity compensation plan, which should clearly state the terms and conditions of the plan. This agreement can be included in the advisory contract or a separate agreement can be created for this purpose.
Conclusion
Whether a startup is getting off the ground or is at a more advanced stage of development, the presence of competent startup advisors can be extremely rewarding for startups. While it is visible that stock-based compensation is the most preferred compensation method for startup advisors.
