Picking Advisors and Professional Service Providers
Once you have picked your co-founders, the next step is identifying potential advisors and professional service providers who will help shepherd your startup to success. Below are a few examples of advisors that many technology startups look to for guidance early on.
The Board of Advisors
After you have formed your company, you might create a “board of advisors.” A board of advisors is distinct from your board of directors in that the board of advisors does not have authority to vote on or make decisions for the company, nor do they owe fiduciary duties to the company or its stockholders. Rather, a board of advisors is typically comprised of individuals who are willing to provide their knowledge and expertise to the company in increments of approximately 5 to 10 hours per month. In exchange for this, they typically receive a relatively small stock option or stock grant (usually in the range of 0.15% to 2% of the company’s fully-diluted capitalization, depending on such factors as how involved the advisor will be, how critical the advisor’s involvement is to the company’s success, and how mature the company is).
Participation on the advisory board should be relatively unburdensome, and your advisors should be individuals who have achieved certain successes or may have certain connections that you can draw upon while building your company. These might be individuals who have achieved success in the market or industry in which your startup will be involved, they may be connected to many high net worth individuals and/or can make introductions to potential investors, or they may be experts in certain fields that pertain to your startup (e.g., finance, design, marketing, or public relations).
The Legal Team
As a lawyer, I may be a little biased here, but I believe that the lawyer/law firm that a startup company initially engages is one of the most important decisions a company faces. Every technology startup should engage sophisticated and experienced corporate and securities counsel to ensure that the company is properly formed, initial agreements with co-founders and other key personnel are done properly, and that the company complies with securities laws. Depending on the type of company and technology involved, patent and/or technology transfer counsel may be necessary as well.
The Corporate/Securities Lawyer. Any startup that raises money from outside investors will need to comply with state and federal securities laws. If you are raising funds from sophisticated investors, they will have certain expectations with respect to your corporate structure and documentation (e.g., proper board and shareholder authorizations, vesting of founders’ shares). Sophisticated corporate/securities counsel can ensure that your company is properly formed and positioned to take outside investments, and, when you do take investments, that you are complying with securities laws. I’ll discuss what to look for in your lawyer(s) in a separate post, but you should look for lawyers who are experienced in working with emerging companies specifically, and who have experience with private securities offerings. All lawyers are not created equal, nor are all “corporate lawyers” equally equipped to handle the unique issues faced by emerging technology companies. Your corporate/securities lawyer should be well-seasoned with respect to corporate law, venture financings, and intellectual property protection.
The Patent and Technology Transfer Lawyers. Depending on the type of company you are launching and the technology involved, you may need to obtain patents, or license technology from third parties (e.g., universities). In these cases, you will want to look for counsel with experience obtaining patents or experience doing sophisticated third-party technology licensing transactions. Likewise, you may need an experienced technology product or services lawyer to help you and your company negotiate and document other important contracts and transactions such as contracts with key suppliers and terms and conditions, privacy policies, and other agreements with your customers. Your corporate/securities lawyer can be a great referral source for these more specialized lawyers.
Other Lawyers. In the course of a technology startup’s lifecycle, it will likely face a myriad of other legal issues such as trademark issues, employment issues, and tax issues. An experienced corporate/securities lawyer can likely guide you through many of these issues without having to refer you to a lawyer who focuses on these specific issues, however, when these issues rise to a level complexity that a specialist is required, a good corporate/securities lawyer should be able to refer you to other lawyers who are well equipped to handle them for you.
Tax issues are notoriously complex, and corporate tax issues are among the worst. Having a good accountant can help ensure that you aren’t over-paying or under-paying state and federal taxes, and can also help ensure that you are making all of the required annual and quarterly filings in all of the relevant jurisdictions. When you raise funding from sophisticated investors, you will likely have to make a contractual representation to them that your company has filed all tax returns and reports required by law and have paid all taxes due. Engaging a good accountant can ensure that you make that representation cleanly. Additionally, you should expect that investors will request to see your company’s financial statements (even if only in pro forma), and a good accountant can help you put these statements together and keep them fresh.
When it comes to startup success, having the right team is just about as important as having the right product or service. The right team can help a startup execute on its plan and achieve a level of success that might not otherwise be attainable. You should think of your advisors and service providers as a part of your team (not just a cost of doing business), and find the right people that can help your venture succeed.