Advisory boards are a standard addition to the support network of a business. Startups will often look to an advisor for their knowledge, experience or an outside perspective — particularly as the business navigates key milestones such as launch, capital raising, hiring and expansion.
Many startups establish an advisory board or have an advisor. But should a startup pay an advisor?
Broadly speaking, an advisor is rarely paid a wage or service fee for their advice. Advisors understand your business needs its cash to help it grow, and it’s likely that founders and key team members are earning just enough to get by. Instead, some businesses give their advisors a small amount of equity in return for their services.
How and When Will the Advisor Contribute to the Business?
It’s important to be clear what role your advisor plays within your startup. Employment laws in North America usually ignore the title you give a worker and instead looks at the work that they do when determining a business’ obligations.
Advisors are rarely considered employees. If, however, they are deemed an employee, they are entitled to a minimum wage and appropriate leave. You would also have to deduct income tax from their wage and pay their superannuation contribution. Key things to look out for in an employee/employer relationship include:
- The startup directs the advisor to work a set number of hours; and
- The startup has provided the advisor with a job description, controls their work, and the advisor uses the business’ equipment to complete it.
If your advisor is merely attending board meetings a few times a year and answering the odd email, it is much more likely that they would be considered an independent contractor or not a worker of the business at all. There is no requirement to pay contractors minimum wage or entitlements.
How Much Value Do They Bring?
How much you choose to pay an advisor — if at all — should directly relate to the value they bring to the business. If you meet with your advisors fortnightly or monthly and they provide ongoing support, it may make sense for you to pay for their expenses when attending meetings and reward your advisors with a small amount of equity.
Are You in a Position to Give Away Equity?
Equity in your startup is valuable. It’s how you can attract a co-founder, key staff and investors.
Compare your advisor’s contribution to your own or your key team members. Are they worth diluting your stake in your company, consequently making it more difficult for you to issue shares in the future? If so, how much should you give them?
The easiest and most tax efficient way for eligible startups to issue equity to an advisor is under an employee share scheme. Under a scheme, you can offer your advisor shares or options to purchase shares in the company. The offer must satisfy certain eligibility criteria. For example, your advisor must be considered a contractor of the company, and they must not hold more than 10% of the company’s shares. Options or shares are usually subject to vesting criteria (for instance, four years vesting with a one year cliff), meaning that your advisor will have to hang around if they want to keep their equity stake.
What Do They Expect?
Ultimately, compensating an advisor is a commercial negotiation. This means it is important to know what the other side expects from the deal. If your advisor is happy to help you and expects nothing in return, you wouldn’t want to offer a stake in your company or break the budget trying to pay them for their time. But if they will be heavily invested in your company, offering shares or options under an ESS might be a better way to repay them for their time and incentivise them for the long-term.
Whether you choose to pay an advisor is a commercial decision. Most advisors won’t require compensation. Be cautious of advisors who ask for a lot in return for a little. An advisor should understand the value of founders retaining as much equity in their business as possible and keeping their cash to grow the business. If an advisor is only concerned about their potential return, they are probably not the right fit for your advisory board and business.
If you have any questions about your startup’s advisory board, get in touch with our Specialist.