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Startups will often look to an advisor for their knowledge, experience, or outside perspective. Advisors are particularly valuable as your business navigates key milestones such as launch, capital raising, hiring and expansion. In some cases, a startup may establish and seek input from a board of advisors, known as an advisory board. This article will discuss the role of startup advisors and how you can compensate your advisor.

Should You Compensate Your Advisory Board?

Many startups establish an advisory board or have an advisor. But should your startup compensate an advisor?

Advisors are not always paid a wage or service fee for their advice. Advisors understand your business needs its cash to help it grow. Likewise, many startups are unlikely to have the surplus cash flow to pay their advisors. Instead, some businesses give their advisors reasonable compensation, such as a small amount of equity (i.e. shares) in return for their services.

How and When Will the Advisor Contribute to the Business?

It is essential to clarify what role your advisor plays within your startup. New Zealand’s Employment laws usually ignore the title you give a worker and instead look at the actual work that they do. The type of work and how the person interacts with the business will affect what employment obligations you owe to that person. 

Advisors are rarely considered employees. However, if 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:

  • you direct the advisor to work a set number of hours; 
  • you have provided the advisor with a job description;
  • the advisor uses your business’ equipment to complete their work; and 
  • you have a high degree of oversight over their work.

Your advisor may simply attend board meetings a few times a year and answer the odd email. In this case, it is much more likely that they are an independent contractor rather than an employee. Importantly 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. You may meet with your advisors fortnightly or monthly, and perhaps they provide ongoing support. In this case, you can consider paying for their expenses when attending meetings. You may also want to reward or compensate your advisor by issuing shares or options. However, your advisor should be aware that if they are receiving shares or options instead of cash payment, they might be liable to income tax on the fair value of the shares or options.

Are You in a Position to Give Away Equity?

Equity in your startup is valuable. It is how you can attract a co-founder, key staff and investors.

Additionally, compare your advisor’s contribution to your own or key team members. Are they worth diluting your stake in your firm, 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 or option scheme. Under a scheme, you can offer your advisor shares or options to purchase shares in the company. Options or shares are usually subject to vesting criteria (for instance, four years vesting with a one year cliff). 

Further, until the options or shares vest, the advisor will not be allowed to sell or transfer those options or shares. This will encourage your advisor to keep contributing to your business so that they can realise the full value of the shares or options (i.e. by selling them to someone else).

What Do They Expect?

Ultimately, compensating an advisor is a commercial negotiation. This means it is essential to know what the other side expects from the deal. If your advisor is happy to help you and expects nothing in return, you would not 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.

Key Takeaways

Whether you choose to compensate an advisor is a commercial decision. Most advisors will not require payment. Be cautious of advisors who ask for a lot in return for a little. An advisor should understand founders’ value retaining as much equity as possible and keeping their cash to grow the business. If an advisor is only concerned about their potential return, they will probably not be the right fit for your advisory board and business.

If you have any questions about your startup’s advisory board, get in touch with LegalVision’s New Zealand startup lawyers on 0800 447 119 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

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