How and when to appoint an adviser for your startup

Legal considerations before onboarding an adviser

In my experience as a startup lawyer, I have seen how a startup can grow faster with a good adviser onboard. An adviser can serve as a strategic resource to help you guide your business especially when you’re just starting out as an early stage company.

Difference between an advisory board or a formal board

There are differences between an advisory board and a formal board.

Legally, only board of directors are recognised by companies law. If the adviser gets appointed as a director in a formal directorship, he or she will also be taking the usual director’s legal responsibilities and duties under the law. For instance, a director needs to make sure that the usual statutory duties like filing the necessary audited accounts, statutory contributions of the company as an employer and other usual legal stuff are done correctly and timely.

An advisory board is a more informal set up and governed by contract law, as the terms of reference for the adviser appointment may be dictated in a contract between the adviser and the company. This is the usual and ideal type of set up we like to suggest to our clients.

Who should you appoint as an adviser?

While there are no prescribed rules on who should be on the board, it may be a good idea to have a diverse mix of people in terms of both experience and knowledge. In Silicon Valley startups are encouraging more diversity policy and that may trickle down to other jurisdictions like Malaysia as well soon.

Also, if your company is in an early stage, my advice is to select a handful of people who can really add value, rather than spending so much time building a large advisory board (usually to entice investors).

Primer on getting an adviser in a startup

Any adviser that you want to onboard needs to sign the necessary paperwork like an advisory appointment letter or a formal adviser agreement (just like how you hire an employee or contractor).

The usual commercial terms in a good appointment include setting out clearly their expected role as an adviser, compensation, and legal relationship should be clearly spelt out. What I meant is if you want the adviser to help you with your MVP you should say clearly in the agreement ‘The adviser will be assisting the company to finalise the MVP up to the completion.’

Additionally, you should specify clearly how you want to remunerate and pay the adviser. Usually, it may be unusual for an early-stage company to pay an adviser (unless the company has already been revenue-generating). A good advisory agreement will have these commercial terms including how the compensation will be paid by the company.

This also includes the board procedures and rules and how and best way to deploy advisers, so that you can spend less time obsessing over the board structures and more time developing your business.

Final thoughts

There seem to be a never-ending debate in Silicon Valley or perhaps other major startup hubs on whether having an adviser is really going to make a huge difference in terms of your fundraising or business prospects.

I think having a good adviser can help you open doors and even bring in money as well but you need to be really careful and selective when deciding to hire one. I have heard some horror stories about founders that onboarded advisers who later ended up not doing their part of the bargain even when the shares have already been issued!

A good appointment letter between your company and an adviser so that you can avoid the common pitfalls and potential misunderstandings.

Updated on August 2024