How to Compensate a Startup Advisor in England

If your startup is in the early stage of its growth cycle, you might seek legal, accounting, or strategic advice from an advisory board. While some advisory boards will accept a traditional fee structure in exchange for advice, other options exist. Given many startup businesses have limited liquidity, many advisory services will accept alternative forms of payment. This article will explain the alternative payment options you may use to compensate a startup advisor and some considerations you should keep in mind. 

Cash Compensation

The most straightforward way to compensate a startup advisor is to negotiate cash payment for their advice. However, most competent and qualified advisors charge a substantial fee for their time which can be upwards of hundreds of pounds an hour. Therefore, unless you have a sizable cash reserve, this may not be an option for your business. 

On the other hand, if you have a specific challenge you need to resolve, paying a professional advisory team a one-off fee to resolve it quickly and efficiently may be your business’ best option. 

Equity Compensation 

A startup advisor may offer their services in exchange for some form of equity in your business. 

Practically, the startup advisor will take a portion of any profit or a share of the dividends you declare. Additionally, depending on the size of the stake and if their shares confer the advisor’s voting rights, they may be able to influence important business decisions. For example, they may be able to influence amendments to your company’s articles of association. 

Kinds of Equity 

Advisors may seek a class of shares in your company that are different from yours. Different classes of shares grant advisors different equity rights in your company. The two main rights in a company are the right to:

• receive dividends; and 
• vote on shareholder matters. 

In many cases, advisors may want your business to issue them preference shares. These shares give them a legal right to first dibs on any dividends your business declares. This can be structured in different ways. For instance, they may be entitled to a fixed return on each preference share they own, such as 7p per share. 

Commercial Considerations

From your perspective, the decision to offer equity in exchange for the advisors’ services must be justified by the value the advisors add. If you are in a position where your business is likely to grow regardless of their advice, offering them a guaranteed share of the success may not be justifiable. 

On the other hand, if rapid growth is not yet on the horizon, offering shares in your company may be a low-risk gamble. That is to say, if your business does not take off, then you have not directly lost anything. However, if it does, then the value of the advisors’ services is self-evident. 

In practice, you might consider tying the extent of their equity compensation to key performance metrics. If the advisors help your business meet the targets, they are entitled to more equity. In all cases, you should seek advice from an independent solicitor. 

Legal Considerations

Before you compensate your startup advisors, there are some legal considerations to keep in mind. 

Advisor or Employee?

English law distinguishes between employees, workers, and independent contractors. Employees and workers are owed additional rights compared to independent contractors. Therefore, you must ensure that any advisor you instruct provides advisory services on an independent contract basis. 

There are certain factors the law considers indicative of an employer-employee relationship. These include whether:

• an employment contract exists;
• the person provides services within set working hours; 
• you pay the person a wage; or 
• the person uses your business’ property to complete their work.  

If your advisor acts as an employee of your business, your business may owe the advisor employer obligations. Ultimately, these obligations are quite onerous.

Shadow and De Facto Directors

On the other hand, you should ensure your advisors do not influence your company in a capacity similar to a director. If they do, the law may view them as a shadow or de facto director. 

Shadow directors and de facto directors are individuals your company has not formally appointed to the board. Nonetheless, they exercise director-like duties. Significantly, the legal directors rely on the advice of the shadow/de facto director(s) to exercise their director duties. 

Importantly, if your advisor(s) is a professional advisor, the law is less likely to conclude that they are exercising director-like duties. Professional advisors include practising accountants and solicitors. 

Key Takeaways 

You may choose to pay your advisors in cash or through shares in your company. Nevertheless, each form of compensation has different commercial implications. Therefore, it is crucial that you obtain independent legal advice, especially when you are considering issuing shares in your business. Likewise, you should ensure that the agreement you strike with your advisors does not grant them excise power over your company. Nor should your relationship with them resemble an employee-employer one. 

If you need help with your business, our experienced startup lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us on 0808 196 8584 or visit our membership page.

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